The Effects of Money Supply on Inflation in Tanzania

Abstract

This paper examines the effects of money supply on inflation in Tanzania. This study uses secondary data extracted from two sources, namely; the National Bureau of Statistics (NBS) and Central Bank of Tanzania (BoT), where all variables employed in the analysis are extracted. The study applies OLS, VAR and ECM technique to examine the effect of selected variables on inflation in Tanzania. OLS and ECM results show that money supply and exchange rate have significant impact on inflation in the short and long run. Further, VAR findings indicate that the current inflation can be influenced by the past state inflation. Therefore, the government of Tanzania is recommended to impose tight monetary policies and expand the proportion of money in the economy from informal to formal transaction. The successful implementation of the suggested indicators to evaluate the inflation in the country will help to cure the instability of inflation, in turn will direct the economy of the country to preferable level.