Fiscal Deficit and its Threshold Effects on Inflation in Tanzania

Abstract

The recent rise in fiscal deficit, coupled with the prolonged increasing trend in public debt poses a significant challenge to the Bank of Tanzania’s inflation objectives and overall country’s macroeconomic stability. Using quarterly time series data spanning 2001 to 2019, this paper contributes to a better understanding of the threshold effects of fiscal deficit in Tanzania, by estimating the Autoregressive Distributed lag model (ADRL) and the Quadratic regression equation to examine the threshold level of Tanzania’s fiscal deficit and its impact on the country’s inflation dynamics. The finding reveals a U-shaped relationship between inflation and fiscal deficit, with a fiscal deficit threshold at 2.69 percent of GDP, above which the deficit significantly contributes to the increase in inflation.