The Impact of Fiscal and Monetary Policy on Structural Transformation: Insights from the Tanzanian Economy

Abstract

The study attempts to analyse the impact of fiscal and monetary policy on structural transformation in Tanzania. To attain this objective, it employs an autoregressive distributed lag (ARDL) model using annual time series data over the period between 1990 and 2019. The structural transformation index (STI) was employed as a proxy for structural transformation. Results show that prudent fiscal and monetary policy can be used to boost structural transformation in the country. In addition, the results suggest that in the long run, increased government spending can impede structural transformation while taxation and money supply affect positively structural transformation. In the short run, lagged tax-to-GDP ratio, broad money supply-to-GDP ratio and forex-to-GDP ratio were found to have a positive and significant impact on structural transformation. Generally, the findings suggest that Tanzania can use monetary and fiscal policies to influence structural transformation.