Empirical Study On The Determinants Of Inflation(Tanzania Case Study)

Inflation is one of the macroeconomic challenges facing Tanzanian economy. The major aim of this study is to find out the determinants of inflation in Tanzania. A review through theories on inflation such as the demand- pull by Keynes, monetary theory by Friedman, expectation hypothesis by Wallace; these theories expose us to key determinants of inflation, which include: aggregate output, money supply, income level, exchange rate, energy price, and interest rate.In an effort to investigate empirically the determinants of inflation in Tanzania, the study employs some econometric techniques to estimate an Ordinary Least Square(OLS) equation, and employing Augmented Dickey- Fuller(ADF) tests for Unit Root and Stationarity of the considered series; real exchange rate, real GDP, interest rate, energy price, and unemployment rate. The estimations were carried out using annual data for the period of 1980 to 2014.The empirical results found that the coefficient of the exchange rate, real gross domestic product(GDP), interest rate, energy price, and unemployment rate are found to be statistically significant.The coefficients of the exchange rate and unemployment rate have a negative correlation with the inflation rate. In addition, the coefficient of real gross domestic product, interest rate, and energy price are found to have a positive correlation with the inflation rate.The study recommends that, the policy makers should implement prudent fiscal policies to assist the monetary policy to achieve its goal of maintaining low and stable inflation; also they should maintain the exchange rate system at a desirable level that will not harm the Tanzanian economy.