Rachel R. Cheti1, Bahati Ilembo2
1A student in Bachelor of Science in Applied Statistics, Mzumbe University, Tanzania
2Department of Mathematics and Statistics Studies, Mzumbe University, Tanzania
Abstract: The objective of the study was to examine the trend of inflation and its key determinants in Tanzania. We used secondary time series data observed annually from January 1970 to 2020 which are inflation rate, GDP, Exchange rate and money supply. The vector autoregressive (VAR) model was employed for modeling. Augmented Dickey-Fuller test (ADF) found that inflation rate, Gross Domestic Product (GDP), exchange rate and Money supply (M3) were initially non-stationary but they became stationary after first differencing so as to proceed with the analysis. Preliminary tests before obtaining vector auto regressive model were carried out before determining the relationship between the variables. Diagnostic test such as serial correlation, heteroscedasticity, stability and normality were also important to evaluate the model assumptions and investigate whether or not there are observations with a large, undue influence on the analysis. We used Granger causality test (GCT) to determine causal- effect relationship between the variables. The results show that, there is a long run relationship between the variables, also the results showed that exchange rate and money supply (M3) both have a positive impact on inflation rate while gross domestic product (GDP) revealed a negative impact on inflation rate. Finally, the forecast of inflation rate for 15 years ahead was performed. The study recommends that the government should pursue both contractionary monetary policy and fiscal policy in order to control inflation in the country.
Keywords: Autoregressive, money supply, inflation
JEL classification: C32, C53, E17
Cheti, R. R. and Ilembo, B., 2021. Vector Autoregressive Approach after First Differencing: a Time Series Analysis of Inflation and its Determinants in Tanzania. Oradea Journal of Business and Economics, 6(2), pp. 43 – 56. http://doi.org/10.47535/1991ojbe128