Relative importance of fiscal and monetary policy on economic growth The case of Tanzania

This study examines the relative importance of fiscal and monetary policy on economic growth in Tanzania using time series data from 1970 to 2010. The main hypothesis of the study is that government expenditure exert larger influence on GDP than changes in money supply and the impact of changes in government expenditure on GDP is more predictable than the impact of changes in monetary policy. The study employs two models, which are original St. Louis Model and Vector Autoregressive Model. The lag length of the variables were determined by the Akaike Information Criteria. The study finds that monetary policy has large and predictable impact on the economic growth than the fiscal policy does. Also the shocks associated with the changes in money supply are larger than the shocks due to changes in government expenditure. This further suggests the relative dominance of monetary policy over fiscal policy. On the policy area, the results suggest that the dominance of monetary policy over fiscal policy implies that stabilization policy can be successfully pursued by monetary policy than fiscal policy. However the two policies should be mutually exclusive because even fiscal policy has the effects on the economic growth.