Inflation, money supply and output: a test for granger causality (1970- 2010)

This study aims at examining the causal relationships between inflation, output and money supply in Tanzania for the period 1970 to 2010. Specifically, the study seeks to evaluate the trend of inflation, output and money supply in Tanzania; to determine the impact of money supply on inflation; to determine the impact of inflation on output as measured by GDP; and to evaluate the nature of causality between money supply, inflation and output in Tanzania.The causal relationship between Money, Inflation and Output in Tanzania for the period 1970 to 2010 was tested by employing Cointegration and VAR Model. The findings revealed no existence of a cointegrating vector in the series used. Money supply Granger cause inflation, the result suggest that monetary stability can contribute towards price stability in the Tanzanian economy since the variation in price level is mainly caused by money supply and also conclude that inflation in Tanzania is a monetary phenomenon. Also, inflation rate granger cause real GDP and it is a unidirectional causality. Similarly, real interest rate granger cause inflation rate at 0.01 levels.