A Revisit of the Causal Effect of Debt Burden on Inflation Dynamics in Tanzania

Abstract

This research paper delves into the impact of national debt on inflation in Tanzania. It uses the autoregressive distributed lag model and the Granger causality approach, with quarterly data from 2003 to 2023. The findings show that total debt stock and public external debt have a negative effect on inflation in the long run. Meanwhile, long-term inflation is positively influenced by both private and public external debt. The study also reveals that national debt has a one-way causal relationship with inflation in Tanzania. These results suggest that the government should focus on managing public debt when making decisions to control inflationary pressure. However, if the government needs to fund a budget deficit, it should prefer external debt over domestic debt since it helps achieve the macroeconomic goal with a reduced risk of inflation.