An Empirical Appraisal of McKinnon’s Complementarity Hypothesis in Tanzania

The prediction of McKinnon’s Complementarity Hypothesis (McKinnon 1973) is that money and investment are complimentary due to self-financed investment and that the real interest rate is the key determinant of capital formation for financially repressed developing economies. Tanzania has experienced a long spell of financial repression as manifested in government putting caps or ceilings on interest rates, state ownership or control of domestic banks and financial institutions, heavy bank borrowing by government, restrictions on entry to the financial industry and directing credit to certain sectors and public entities. Although financial repression can facilitate economic development, for the case of most developing countries it is hypothesized by McKinnon (1973) and Shaw (1973) that it retards savings and investment and thereby inhibits capital formation and economic growth. This paper critically appraises the complementarity hypothesis in Tanzania by an empirical approach. The Autoregressive Distributed Lag (ARDL) model estimation results and the Bounds Test are supportive of the hypothesis, confirming basic complementarity between accumulation of money balances and investment. Higher real interest rates raise capital formation via the increase in real money balances. The policy implication is an exit from financial repression by achieving positive market determined interest rates in order to secure greater levels of investment

Macroeconomic Policy, Capital Inflows and Growth in Tanzania

The paper makes an analysis of the link between macroeconomic policy, private capital inflows and growth in Tanzania by the use of quantitative analysis. The main hypothesis is that policy has both positive and negative influence on private capital inflows, and flows have influence on growth. Estimation results of the private capital inflows equation show no significance of GDP, deficit, inflation and openness coefficients. Despite being insignificant, the coefficients on inflation and interest rate have wrong signs from those expected. As hypothesized, the more a country services its debt, the more foreign capital flows in, and this is also so for the exchange rate and investment in infrastructure. The existence of a parallel market discourages foreign capital inflows as is the case with credit flow to the private sector. From the growth equation it is seen that private capital inflows have positively affected growth, while inflation has had a negative effect. Other variables, credit to the private sector, openness, and infrastructural investment have the right signs as hypothesized, and are significant at conventional significance levels of 5% and 10

Monetary Programming for Growth in Tanzania

Economic managers in central banks and finance ministries in emerging market economies have increasingly been faced with the challenge of making and implementing policy decisions by using indirect policy instruments. This has necessitated development of proper programming frameworks as well as proper understanding of the interactions of macro-economic variables. Monetary programming has become such an important framework. This paper attempts to develop a monetary programming framework for Tanzania. Tanzania has become such an important framework for Tanzania. Tanzania has implemented economic reforms since the mid 1980s-moving from a centrally controlled economy to free market economy. The methodology used was econometric estimation of a macro-economic model, built with incorporation of information obtained through surveys. The survey results indicated that the majority of policy makers (90%) showed that they were aware of the way monetary policy is conducted, (60%) of the respondents expressed dissatisfaction with the conduct of monetary policy pointing out conflicting objectives, crowding out of the private sector, and lack of transparency. The econometric framework was characterized by ten equations for the four sectors of the economy namely; output and expenditure; the public sector; the monetary sector; and the external sector. Data for the estimates covered the period 1986 to 1998, which corresponds with the period of economic liberalization. Results of the estimations showed that current consumption is highly determined by disposable income and lagged consumption. There was no evidence though, that consumption was affected by interest rates. Similarly investment is weakly influenced by the interest rate but strongly and positively affected by output and government expenditure. Output is positively influenced by changes in money supply. In the short run output moves in the opposite direction with changes in the real exchange rate. This can be attributed to the fact that when domestic currency depreciates the cost of import dependent activities increases possibly affecting output negatively. Exports are influenced by real output and their own lagged values while imports are influenced by output and their own lagged values. No strong evidence of exchange rate influence is obtained, in support of the argument that the demand for imports is inelastic to movements in the exchange rate. Demand for money is positively influenced by real output and is negatively influenced by inflation. The coefficient of interest rate however is positive contrary to theory. This can be explained by the coincidence of liberalization of interest rates with the rate of growth of money supply, which began to decline due to tight monetary policy. Domestic prices are positively influenced by foreign prices, changes in money supply, the exchange rate and negatively influenced by real output. Domestic interest rates are influenced by both foreign interest rates and money supply. The money supply equation was included in an attempt to establish the relationship between current level of broad money supply and the level of reserve money and its own lagged values. The findings show that the current values of money are mainly related to their lagged values and by the level of current and lagged reserve money. With respect to tax revenue it was found that private consumption is the determinant of tax revenue. This is natural given the recent introduction of VAT and predominance of trade taxes in total revenue. Surprisingly imports are not a significant factor in influencing domestic revenue. The findings of this study provided an important contribution to the understanding of the macroeconomic environment within which monetary policy operates in Tanzania. (Af. J. of Finance and Management: 2003 11 (2): 1-25