Original Research

The effect of a budget deficit on inflation: The case of Tanzania

M Solomon, WA de Wet
South African Journal of Economic and Management Sciences | Vol 7, No 1 | a1431 | DOI: https://doi.org/10.4102/sajems.v7i1.1431 | © 2004 M Solomon, WA de Wet | This work is licensed under CC Attribution 4.0
Submitted: 09 July 2004 | Published: 23 July 2004

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M Solomon, University of Pretoria
WA de Wet, University of Pretoria

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Abstract

The Tanzanian economy has remained one of the limited numbers of countries that has experienced a relatively high inflation rate, accompanied by high fiscal deficits for a prolonged period in the absence of any hyperinflation. This paper examines the deficit-inflation relationship in the Tanzanian economy and establishes the causal link that runs from the budget deficit to the inflation rate usingcointegration analysis over the period 1967-2001. Some dynamic simulations are done to gauge the effect of a change in the budget deficit and gross domestic product on inflation over time. Due to monetisation of the budget deficit, significant inflationary effects are found for increases in the budget deficit.

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