Monetary vs. Fiscal Policy: An Empirical Investigation in Tanzania, 1966–2013

Abstract

This study examines the relative importance of fiscal and monetary policy on economic
growth in Tanzania by using quarterly time series data for the period 1966: I to 2013: IV.
The hypotheses tested are that fiscal rather than monetary policy tools exert a relatively
stronger and larger influence on economic activity; and the impact of fiscal policy is more
predictable than that of monetary policy. The analysis was based on the original and a
modified St. Louis equation in the form of a Distributed Lag Model estimated by using
the Restricted Vector Autoregressive (VAR) model and Autoregressive Distributed Lag
(ARDL) technique. The study finds that monetary policy tools, measured by money
supply, had a relatively stronger, larger and predictable impact on economic growth than
fiscal policy, measured by government expenditure. Also, the shocks associated with
changes in money supply were larger than the shocks due to changes in fiscal policy.
However, over the short-run the shock due to changes in fiscal policy on economic activity
was larger; and that of monetary policy was larger over the long-run. The estimation
results suggest that the modified St. Louis equation was more superior to its original
form. The results suggest the relative dominance of monetary over fiscal policy, implying
that stabilization policy can be successfully pursued by the former rather than the latter
policy. However, either of the policy should not be used exclusively because even fiscal
policy is found to have an effect on growth, at least over the short-run period.

Keywords: fiscal dominance, monetary policy, economic growth, autoregressive
distributed lag model.
JEL Classification: E31, E37