Money and output in Tanzania: a test for causality, 1970-2004

Following Sims's celebrated and controversial investigation of money-income causality patterns in the U.S, a number of researchers have attempted to replicate his study in other nations. This study has investigated empirically the causal relationship between Money and output in Tanzania for the period 1 970 to 2004. Based on the money-income causality hypotheses, investigated by various test and regressions, the following findings were obtained. For two cases of the cause relationship between money (MI and M2) and output, the hypothesis that the causality is unidirectional from money to output was rejected, while the hypothesis that the causality is unidirectional from output to money was accepted. The findings support the theoretical postulation by Keynesians, who argues that money does not play an active role in changing output. In fact, changes in output cause changes in money stocks via demand for money, implying that the direction of causation runs from output to money without any feedback. The policy implication of the findings of this study is that monetary policy cannot influence financial environment. Since money supply is-endogenously determine in the short-run, lowering of interest rate may result in over investment that consequently spurs inflationary pressures. The government should rely on fiscal policy rather than monetary policy in attaining macroeconomic objectives other than price stability.