The Impact of Government Expenditure, Money Supply and Inflation on Economic Growth in Tanzania

Abstract

This study examines the impact of government expenditure, money supply and inflation on economic growth in Tanzania. Like the case in other countries both developed and developing countries, one of the fundamental objectives of macroeconomic policies in Tanzania is to promote economic growth and to make general price at a low level. Majority of researchers have entered on substantial debate on whether inflation promotes or harms economic growth. Motivated by this debate, the study conducted a study covering the period 1970 to 2011. An Augmented Dickey fuller (ADF) used to test for stationarity of data and the existence of co integration were tested by an ARDL bounds tests. The ARDL model was employed to estimate the impact of government expenditure, money supply, inflation and its relationship to economic growth of Tanzania. Results suggest that inflation has a negative impact on economic growth and also government expenditure and money supply have significant impact to economic growth both in short run and long run though they differ in magnitude. The study suggest the government to maintain a single digit inflation which is less than 3% to avoid its harm to economic growth and to be carefulin implementation of monetary policy and fiscal policy because inflation seems to be a major macroeconomic variable in the economy. In addition, the study proposes to upcoming researchers to add or remove other variable (s) either government expenditure or money supply in the model to observe further effect of inflation to economic growth.