Towards price stability in Tanzania: to what extent do budget deficits matter?

Persistent high levels of in inflation in Tanzania have stimulated research interest amongst economists and policymakers. This study aimed at assessing the extent to which budget deficits behavior matter in explaining inflation and attainment of price stability in Tanzania during the period 1980 to 2010. The analysis was based on annual time series data. Engle-Granger reintegration tests showed existence of a long-run relationship among the variables; and this paved to the formulation of an enter correction model (ECM). The results showed that there is a weak linkage between budget deficit and money supply, and, therefore, between budget deficits and inflation in Tanzania. Such factors like exchange rate seemed to have a close link with inflation in the long-run; and, in the short-run output and money supply played a significant role in explaining changes in the general price level. Thus, in line with the use of monetary policy to control inflation, deliberate fiscal policy actions to eliminate budget deficits is required to achieve price stability in Tanzania. Moreover, the government in Tanzania should be spending in such a way that it also increases economic growth by increasing output and be careful in its exchange rate management policies.