The dynamic determinants of interest rates in Tanzania: A focus on inflation, money supply and exchange rates
No Thumbnail Available
Date
2015
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
Mzumbe University
Abstract
High interest rates prevail in developing countries including Tanzania since full implementation of financial sector reforms where interest determined by the market force have restricted the access of potential borrowers to credit markets thus reducing investments and limiting growth potentials of the economy. This study was conducted to determine the dynamic determinants of interest rates in Tanzania with a focus on inflation, money supply and exchange rates. The study used time series secondary data covering the period 1970-2013, extracted from two main sources, namely; the National Bureau of Statistics (NBS) and Central Bank of Tanzania (BoT), where all variables employed on the analysis are extracted. The study applied OLS, Johnsen Cointegration and VECM technique to examine the effect of Inflation Rates, Money Supply and Exchange Rates Dynamics to Interest Rates in Tanzania. Johnsen co-integration test was employed to test for existence of long run relationships between variables interest rate, inflation rate, money supply and exchange rates and the results showed the existence of long run relationship among variables and they move together and suggested to use VECM instead of VAR. Stationarity test was enhanced by the use of Augmented Dickey Fuller and Philip Perron test. The results showed that all variables exhibit unit roots at level and they became stationary after performing first difference. VECM results revealed that money supply had significant effect on interest rate and the effect of inflation rate and exchange rate dynamics to interest rate were not significant for the period under study. Therefore, in order to correct short term disequilibrium of interest rate, the government should adjust money supply. The OLS results showed that explanatory variables significantly affect interest rates but the R- square was very low for the model. Even if, only money supply seemed to have statistically significant impact on interest rate, the government should not ignore other variables such inflation rate and exchange rate because they are important in monetary policy.
Description
A Dissertation Submitted in Partial/Fulfilment of the Requirements for Award of the Degree of Master of Science in Accounting and Finance (MSc A&F) of Mzumbe University.
Keywords
Interest rate, Inflation rate, Money Supply, Exchange rates, Financial Sector Assessment Programme, Credit Reference Bureau, money supply