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Is there a case for inflation targeting in Tanzania?
(University of Dar es Salaam, 2016) Makuka, Gabriel Magati
This study examines whether there is a case for inflation targeting in Tanzania. This goal is achieved by investigating the dynamics of inflation in Tanzania as well as the degree of central bank independence. The analysis is done using an ARDL model in E-views 9 and annual data from 1984-2014. The empirical results suggest that inflation in Tanzania originates more from the supply side as compared to the demand side. This is because supply side causes of inflation such as food production index and growth rate of GDP were found to have the largest impact on inflation. From the demand side, money supply is found to be significant however it has less impact on inflation as compared to food production index or growth rate of GDP. Furthermore, in Tanzania, central bank independence is limited and marred by political interference. Basing on these results, the study finds weak evidence for inflation targeting in Tanzania. Conclusively, the study is against a strict rules based approach such as inflation targeting and instead calls for a more discrete approach on the part of BOT in responding to shocks. The study also finds that CBI as well as transparency and accountability should be improved. In addition, the study finds that there is a need for setting up policies that aim at increasing food production in Tanzania.