Inflation Dynamics And Economic Growth In Tanzania: A Multivariate Time Series Model Nicholas M. Odhiambo, University of South Africa, South Africa

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1 The Joural of Appled Busess Research MayJue Volume 8, umber Iflao Dyamcs Ad Ecoomc Growh I Tazaa: A Mulvarae Tme Seres Model cholas M. Odhambo, Uversy of Souh Afrca, Souh Afrca ABSTRACT Ths sudy exames he shor-ru ad log-ru causal relaoshp bewee flao, vesme ad ecoomc growh Tazaa. I he ma, he sudy corporaes vesme a bvarae seg bewee flao ad ecoomc growh hece, creag a rvarae model. The sudy aemps o aswer oe crcal queso: Does flao have ay sgfca fluece o ecoomc growh ad vesme Tazaa? Usg he ARDL-bouds esg approach, he sudy fds a udrecoal causal flow from flao o ecoomc growh whou ay feedback respose. The sudy also fds ha vesme Tazaa uambguously causes ecoomc growh. The resuls apply rrespecve of wheher he causaly s esmaed he log ru or he shor ru. Keywords: Afrca; Tazaa; Iflao; Iflao; ad Growh. ITRODUCTIO T he dyamc relaoshp bewee flao ad ecoomc growh has recely bee a subjec of ese debae. Some sudes argue ha here s a dsc ad uambguous egave relaoshp bewee flao ad ecoomc growh. Accordg o hese sudes, flao creases he rasaco ad formao coss; ad hese coss, ur, hder ecoomc growh ad developme (see Rousseau ad Wachel, ). Whe flao s hgh ad persse, ecoomc ages fd log-erm plag o be dffcul, because of he uceray abou fuure absolue ad real prces. Ths makes dffcul for ecoomc ages o eer o ew coracs; whch, ur, hbs vesme, resource-allocao ad ecoomc growh. Iflao also dscourages savgs, by makg he prese value of moey o be hgher ha s fuure value hereby, leadg o a decrease he qualy ad quay of vesme. Some of he sudes whose fdgs drecly or drecly suppor a egave relaoshp bewee flao ad ecoomc growh clude Bruo ad Easerly (998), Barro (996), Burdek e al. (994) ad Fscher (99). Bruo ad Easerly (998), for example, fd a egave relaoshp bewee hgh flao (more ha 4%) ad ecoomc growh. The auhors argue ha he egave relaoshp bewee hgh flao ad ecoomc growh s largely due o hgh flao epsodes. Barro (996), however, fds ha here s a egave ad sgfca relaoshp bewee flao ad ecoomc growh oly whe flao exceeds %. Burdek e al (994) also fd egave effecs of flao o ecoomc growh he coures suded alhough he magude of hese effecs s much larger for he dusral coures ha s for developg coures. Fscher (99) also argues ha flao s o good for log-erm growh, however weak he evdece o he corary may be. Ohers scholars, however, argue ha here s a hreshold, below whch a moderae crease flao promoes growh, bu above whch furher creases flao reard ecoomc growh. Ths hreshold, however, dffers from coury o coury ad over me. Uforuaely, emprcal sudes o he relaoshp bewee flao ad ecoomc growh sub-sahara Afrca coures, whch have bee mred hgh flao over he years, are very sca. The majory of he prevous sudes o he dyamcs of flao have coceraed maly o he deermao of flao hreshold raher ha o he causaly bewee flao ad ecoomc growh. The Clue Isue 7

2 The Joural of Appled Busess Research MayJue Volume 8, umber To he bes of our kowledge, hs s he frs sudy o rgorously exame he causal relaoshp bewee flao ad ecoomc growh Tazaa usg he recely developed ARDL-bouds esg approach. I order o address he omsso of varable bas, whch s assocaed wh a umber of prevous sudes, hs sudy corporaes vesme, as a erme varable bewee flao ad ecoomc growh, a r-varae seg. The movao for cludg vesme he model s formed by he heorecal lk bewee vesme ad ecoomc growh o he oe had, ad ha of vesme ad flao, o he oher had. For example, a crease vesme leads o a crease come, whch leads o more cosumpo hereby, resulg a furher crease come. Ths argume s based o he oo ha a small crease vesme has a larger effec o come because ecoomc ages are lkely o sped he creased come hereby, leadg o a hgher GDP (see Keyes, 96). Ulke he vesme-growh relaoshp, he flao-growh relaoshp s largely egave, especally whe flao s very hgh. Specfcally, flao makes he omal values of fuure asses ucera hereby, makg curre vesme plag more dffcul. I oher words, hgh ad upredced flao hbs vesme because dscourages vesors from eerg o ew coracs. I such cases, hgh flao would o oly hb ecoomc growh, bu could also resul a facal recesso (see Hellerse, 997). The res of he paper s orgased as follows: Seco hghlghs he dyamcs of flao ad ecoomc growh Tazaa. Seco preses he esmao echques ad he emprcal resuls, whle Seco 4 cocludes he sudy.. IFLATIO DYAMICS AD ECOOMIC GROWTH I TAZAIA Low flao has bee a he hear of Tazaa s moeary auhores sce he coury aaed depedece he 96s. I fac, he prmary msso of he Bak of Tazaa (Tazaa ceral bak) s o maa domesc prce sably ha s coducve o he aame of macroecoomc sably ad he acheveme of susaable growh. The Bak of Tazaa has he resposbly of esurg ha moeary codos ha here cosse wh low ad suable flao are esablshed (see SADC, ). Ulke some coures, Tazaa flao rae excludes food prces. Ths s because food prces are very volale ad are mos cases drve by shor lved supply-sde facors raher ha he demad-sde facors. Accordg o he Bak of Tazaa, food prces are somemes affeced by o-moeary facors, lke drough ad floods, whch may aggravae he overall flao rae rrespecve of moeary polcy. Ths was evdeced December, whe he food flao was 6.%, whle he o-food flao was 4.7%. I Tazaa, flao s cosdered o be a moeary pheomeo. Hece, s corolled by fluecg he growh of broad moey supply.e. (M) whch cludes currecy crculao ousde baks, he oal deposs held by commercal baks, excludg foreg currecy deposs. Sce he 98s, he Tazaa moeary auhores have made sgfca progress coag flao. Alhough Tazaa s average flao rae remaed a a double-dg level bewee 98 ad 998; he rae laer decled pheomeally bewee 996 ad, wh he lowes flao rae recorded. I, he rae creased slghly, bu bewee ad 4, he rae sysemacally decled, wh he lowes rae sce he 98s beg recorded 4. Alhough he rae remaed a a sgle-dg level bewee ad 7, laer creased o a double-dg level bewee 8 ad 9, before aga decreased o a sgle dg. Fgure shows he reds of flao Tazaa bewee 996 ad. Ulke he case of flao, he Tazaa s ecoomc growh has show a more or less errac red. Alhough he coury recorded a average GDP growh rae of abou % bewee 99 ad, he GDP growh rae 99 was oly.84%. The rae, however, laer creased sgfcaly o 4.6% 996. Bewee ad, he real GDP growh rae furher creased seadly from 4.9%, o 6%, ad 7.%. Alhough he rae slghly decreased o 6.9%, laer creased sgfcaly o 7.8% 4. Alhough he rae decreased somewha bewee 4 ad 6, from 7.8% 4 o 7.4% ad laer o 6.7% 6, laer creased slghly o 7.% 7 ad 7.4% 8. Eve afer he 89 world ecoomc ad facal crss, Tazaa s curre real GDP growh s sll hgher ha he ad growh raes (see Global Face, ). Fgure shows he reds of GDP growh rae ad per capa GDP growh rae Tazaa durg he perod The Clue Isue

3 The Joural of Appled Busess Research MayJue Volume 8, umber Iflao (cosumer prces - aual %) Iflao(GDP deflaor - aual %) Fgure : Treds of flao Tazaa durg he perod 996- Source: World Developme Idcaors () GDP growh (aual %) GDP per capa growh (aual %) Fgure : Treds of GDP growh rae ad GDP per capa growh rae Tazaa durg he perod 996- Source: World Developme Idcaors () The Clue Isue 9

4 The Joural of Appled Busess Research MayJue Volume 8, umber The Clue Isue. ESTIMATIO TECHIQUES AD EMPIRICAL AALYSIS. Coegrao ARDL-bouds Tesg Procedure The coegrao echque used hs sudy s based o he recely developed Auoregressve Dsrbued Lag (ARDL)-bouds esg approach by Perasa e al. (). The ARDL-bouds model used hs sudy ca be expressed as follows:...() 6 4 IIV IIF Iy IIV IIF Iy Iy...() 6 4 IIV Iy IIF IIV Iy IIF IIF...() 6 4 IIF Iy IIV IIF Iy IIV IIV Where: Iy = log of real per capa come; IIF = log of cosumer flao; IIV = log of vesme; µ = whe ose error erm; Δ = frs dfferece operaor. The bouds-esg procedure s based o he jo F-sasc or Wald sasc, whose asympoc dsrbuo s o-sadard. I he bouds-esg approach, he ull hypohess of o coegrao amog he varables equaos (), () ad () s esed agas he alerave hypohess ha here s a coegrao amog he varables uder sudy. Two ses of crcal values are repored by Pesara ad Pesara (997) ad Pesara e al. () for ay gve sgfcace level. Whle oe se of crcal values assumes ha all varables cluded he ARDL model are I(), he oher se assumes ha he varables are I(). Whe he compued es sasc exceeds he upper crcal bouds value, he he Ho hypohess s rejeced. Whe he F-sasc s lower ha he lower bouds value, he he ull hypohess of o coegrao cao be rejeced. However, whe he F-sasc falls o he bouds he coegrao es becomes coclusve.. Grager o-causaly Tes The Grager-causaly bewee flao, vesme ad ecoomc growh ca be examed by usg he followg model (see also Odhambo, 9a; Odhambo, 9b; araya ad Smyh, 8)..(4) ECM IIV IIF Iy Iy..() ECM IIV Iy IIF IIF

5 The Joural of Appled Busess Research MayJue Volume 8, umber IIV IIV Iy IIF ECM.(6) Where ECM - = he lagged error-correco erm obaed from he log-ru equlbrum relaoshp. The aual daa used hs sudy, cover he perod 97-9, ad are obaed from he Ieraoal Facal Sascs (IFS) Yearbook (9) ad he World Developme Idcaors (). The dreco of he causaly bewee IF, y ad IV ca be deermed from equaos (4), () ad (6) usg he F-sasc ad he lagged error-correco erm. The sasc o he coeffce of he lagged errorcorreco erm represes he log-ru causal relaoshp, whle he F-sasc o he explaaory varables represes he shor-ru causal effec (see also Odhambo, 8; araya ad Smyh, 6). I s also worh og ha eve hough he error-correco erm has bee corporaed all he equaos (4) (6), oly equaos where he ull hypohess of o coegrao s rejeced, wll be esmaed wh a error-correco erm (see araya ad Smyh, 6; Morley, 6; Odhambo, 9a).. Emprcal Aalyss.. Saoary Tess The saoary ess of y, IF ad IV were coduced levels ad o frs dfferece. The resuls of he saoary ess levels (o preseed here) show ha o he whole, he varables are o-saoary levels. Cosequely, he varables were dffereced oce, order o perform saoary ess o dffereced varables. The resuls of he saoary ess o dffereced varables are preseed Table. Table : Saoary Tess of Varables o frs Dfferece Varable o Tred Tred Phllps-Perro (PP) Tes y *** -.847** IF *** -6.87*** IV *** *** Dckey-Fuller - GLS Tes y -.884*** ** IF *** -6.98*** IV *** -9.87*** oe: )The rucao lag for he PP ess s based o ewey ad Wes (987) badwdh. ) *** deoes % level of sgfcace. ) Crcal values for Dckey-Fuller GLS es are based o Ello-Roheberg-Sock (996, Table ). The resuls repored Table show ha all he hree varables are saoary afer beg dffereced oce. Ths, herefore, shows ha he ARDL-bouds esg approach ca ow be used because oe of he varables s egraed of order wo [I()] or hgher... Bouds Tes for Coegrao The frs sep of he ARDL-bouds esg approach volves obag he order of lags o he frs dffereced varables equaos () - () from he uresrced models usg he Akake Iformao Crero (AIC) ad he Schwarz Bayesa Crero (SBC). The resuls of he AIC ad SBC ess (o repored here) show ha he opmal lag of y ad IV equaos s wo, whle he case of IF equao, he opmal lag s lag. The secod sep volves applyg he bouds F-es o equaos () () order o esablsh wheher a log-ru relaoshp exss bewee y, IF ad IV. The resuls of he bouds es are repored Table. The Clue Isue

6 The Joural of Appled Busess Research MayJue Volume 8, umber Table : Bouds F-es for Coegrao Depede varable Fuco F-es sasc Iy y (IF,IV) 6.6*** IIF IF(y, IV). IIV IV (y, IF).7 Asympoc Crcal Values % % % I() I() I() I() I() I() Pesara e al (), p., Table CI() Case II oe: *** deoes sascal sgfcace a he % level. The resuls repored Table show ha here s evdece of coegrao he y equao, bu o he IF ad IV equaos. Ths s suppored by he calculaed F sasc, whch s sascally sgfca y equao, bu o he IF ad IV equaos... Aalyss of Grager-causaly Tes Havg cofrmed he exsece of a log-ru relaoshp bewee y, IF ad IV seco 4.4., he ex sep s o exame he dreco of causaly bewee he hree varables. The resuls of hese causaly ess are repored Table. Table : Grager o-causaly es F-sascs [P-value] - sascs Depede varable Iy IIF IIV ECM - Iy - 6.7[.8]***.647[.4]*** -.86*** [-.74] IIF.7[.77] [.]*** IIV.4[.]***.7[.] - - The emprcal resuls repored Table show ha here s a shor-ru ad log-ru udrecoal causal flow from flao o ecoomc growh Tazaa, bu o vce versa. The shor-ru causaly s suppored by he correspodg F-sasc he y equao, whch s sascally sgfca, whle he log-ru causaly s suppored by he lagged error-correco erm, whch s foud o be egave ad sascally sgfca he y equao. The resuls also show ha here s a u-drecoal causal flow from vesme o ecoomc growh alhough here s a feedback shor-ru causal flow from ecoomc growh o vesme. Oher resuls show ha a udrecoal causal flow from vesme o flao could oly be esablshed he shor ru. 4. COCLUSIO Ths paper has examed he causal relaoshp bewee flao ad ecoomc growh usg a mulvarae model. Specfcally, he sudy corporaes vesme he bvarae seg bewee flao ad ecoomc growh hereby, creag a smple rvarae model. The movao for cludg vesme he model s formed by he heorecal lk bewee vesme ad ecoomc growh o he oe had, ad ha of vesme ad flao, o he oher had. Prevous sudes o hs subjec have coceraed maly o Asa ad La Amerca coures. Very few sudes have bee coduced sub-sahara Afrca coures. Usg he ARDL-bouds esg approach, he sudy fds ha here s a uque coegrag relaoshp bewee flao, vesme ad ecoomc growh. The sudy also fds ha here s a dsc udrecoal causal flow from flao o ecoomc growh, whou ay feedback relaoshp. Ths apples rrespecve of wheher he ess are coduced he shor ru or he log ru. Oher resuls show ha here s: ) A shor-ru ad log-ru causal flow from vesme o ecoomc growh; ) a shor-ru causal flow from ecoomc growh o vesme; ad ) a shor-ru causal flow from vesme o flao. The Clue Isue

7 The Joural of Appled Busess Research MayJue Volume 8, umber AUTHOR IFORMATIO Prof cholas M Odhambo s currely workg as Professor of Ecoomcs ad Char of Growh, Povery ad Polcy Modellg (GPPM) Research flagshp a he Uversy of Souh Afrca (UISA). He s a RF-raed researcher, ad has publshed more ha arcles recogsed jourals. He holds a PhD (Ecoomcs) degree from Sellebosch Uversy (Souh Afrca) ad a Masers degree Ecoomcs from he Uversy of Dar-essalaam (Tazaa). E-mal: Odham@usa.ac.za REFERECES. Bak of Tazaa (Aual Repor), Varous Issues.. Barro, R.J., 996, Iflao ad Growh, Federal Reserve Bak of S. Lous 78, pp Bruo, M. ad Easerly, W., 998, Iflao Crss ad Log-ru Growh, Joural of Moeary Ecoomcs 4, pp Burdek, R.C.K., Goodw, T., Salamu, S., ad Wlle, T.D.(994), The Effecs of Iflao o Ecoomc Growh Idusral ad Developg Coures: Is There a Dfferece?, Appled Ecoomcs Leers, Ello, G., Roheberg, T., Sock J. (996), Effce Tess for A Auoregressve U Roo, Ecoomerca 64, Fscher, S., 99, The Role of Macroecoomc Facors Growh, Joural of Moeary Ecoomcs, pp Hollerse, R. (997), The Impac of Iflao, Regoal Revew, Volume 7, umber. 8. Ieraoal Facal Sascs Yearbook, IMF, Keyes, J.M. (96), The Geeral Theory of Employme, Ieres ad Moey, Lodo, Harcour Brace.. Morley, B. (6), Causaly Bewee Ecoomc Growh ad Mgrao: A ARDL Bouds Tesg Approach, Ecoomcs Leers 9, araya, P.K. ad Smyh, R. (6), Hgher Educao, Real Icome ad Real Ivesme Cha: Evdece From Grager Causaly Tess, Educao Ecoomcs 4, 7-.. araya, P.K. ad Smyh, R. (8), Eergy Cosumpo ad Real GDP G7 Coures: ew Evdece From Pael Coegrao Wh Srucural Breaks, Eergy Ecoomcs, -4.. ewey, W.K. ad Wes, K.D (987), A Smple, Posve Sem-Defe, Heeroskedascy ad Auocorrelao Cosse Covarace Marx, Ecoomerca : Odhambo,.M. (8), Facal Deph, Savgs ad Ecoomc Growh Keya: A Dyamc Causal Lkage, Ecoomc Modellg (4), Odhambo, M (9a), Face-Growh-Povery exus Souh Afrca, The Joural of Soco- Ecoomcs 8(): Odhambo.M. (9b), Ieres Rae Reforms, Facal Deepeg ad Ecoomc Growh Keya: A Emprcal Ivesgao, The Joural of Developg Areas 4(): Pesara, M., Pesara, B., 997. Workg wh Mcrof 4.: Ieracve ecoomc aalyss, Oxford Uversy Press, Oxford. 8. Pesara, M., Sh, Y. ad Smh, R. (), Bouds Tesg Approaches o he Aalyss of Level Relaoshps, Joural of Appled Ecoomercs 6, Rousseau, P.P. ad Wachel, P. (), Iflao Thresholds ad he Face-Growh exus, Joural of Ieraoal Moey ad Face, pp SADC (), Facal Sysems Tazaa, Commee of Ceral Bak Goverors.. World Bak (7), Afrca Developme dcaors, varous ssues o 9, Washgo DC. World Bak (), Afrca Developme dcaors, varous ssues o 9, Washgo DC The Clue Isue

8 The Joural of Appled Busess Research MayJue Volume 8, umber APPEDIX SELECTED STATISTICS Appedx Year GDP per capa (cosa LCU) GDP growh (aual %) GDP per capa growh (aual %) Source: World Developme Idcaors () Appedx Year Iflao (cosumer prces - aual %) Iflao (GDP deflaor - aual %) Source: World Developme Idcaors () Appedx Year Gross fxed capal formao (% of GDP) Gross fxed capal formao (aual % growh) Source: World Developme Idcaors () 4 The Clue Isue