What is the Right Policy-mix for Macroeconomic Stabilization in Tanzania?

Abstract

The purpose of this paper was to find out the right policy-mix for macroeconomic stabilization in Tanzania. The paper employed the co-integration and error correction modeling approach to analyze the interaction effects of fiscal and monetary policies on macroeconomic stability. The results show that fiscal and monetary expansion characterized by high government expenditure and high broad money supply deteriorates macroeconomic stability, but fiscal and monetary expansion characterized by low tax buoyancy and low interest rate enhances macroeconomic stability. The results further indicate that fiscal and monetary tightening characterized by low government expenditure coupled with low broad money supply strengthens macroeconomic stability, but fiscal and monetary tightening characterized by high tax buoyancy and high interest rate weakens macroeconomic stability. Furthermore, the results reveal that fiscal expansion and monetary contraction characterized by high government expenditure and high interest rate improves macroeconomic stability, but fiscal expansion and monetary contraction characterized by low tax buoyancy accompanied by low broad money supply dampens macroeconomic stability. Moreover, the results show that fiscal contraction and monetary expansion characterized by low government expenditure and low interest rate impairs macroeconomic stability, but fiscal contraction and monetary expansion characterized by high tax buoyancy coupled with high broad money supply drives macroeconomic stability. Lastly and more importantly, the study found that out of all policy-mix options and strategies under investigation, the right policy-mix is fiscal contraction and monetary expansion characterized by high tax buoyancy and high broad money supply. The policy implication of the findings is that in order to stabilize macroeconomic environment in Tanzania, fiscal and monetary authorities have to widen both tax base and monetary base.