Abstract:
This paper examines the fscal dominance hypothesis in Tanzania by exploring
the relationship between the monetary base and the government debt using
monthly data from 2003:1 to 2019:12. Results from formal statistical tests indicate
no evidence of a long-run relationship between the variables. Structural vector
autoregressive model is thus estimated to analyse the short-run dynamics. The
fndings point to a positive and statistically signifcant impact of government
debt on monetary base. The fndings identifes political phenomenon that
before the fourth phase government (2003-2005), monetary policy witnessed
relatively intensive fscal dominance as compared to the fourth phase (2005-
2015) and ffth phase government (2015-2019). However, in comparison with
the fourth phase government, fndings suggest that during the frst four years
of the ffth phase government, monetary policy encountered a relatively high
fscal influence, partly attributed to implementation of huge development
projects and reduction in foreign fnancing in the government budget. The
identifed fscal dominance for the sample period, implies a subordinated
monetary policy, compromising on Bank of Tanzania’s primary objective of
price stability.