Monetary and Fiscal actions: A test of their relative importance in Economic stabilization in Tanzania.

This study has assessed the potency of monetary and fiscal actions in economic stabilisation in the Tanzanian Economy. The analysis used both statistical and econometric procedures. It has been found from statistical analysis that monetary and fiscal actions are closely related bringing about an identification problem on whether which of them is actually in operation. this has been seen to arise from the money supply process where by claims on government on the central bank play a major role. This again is a result of an underdeveloped financial system forcing the absence of open market operations and therefore reliance on banks as a source of filling the government budget deficit. In such circumstances, fiscal actions an monetary actions are out of control of the authorities as government expenditure has not grown proportional to tax revenues. Fiscal actions have therefore been among the destabilizing factors in the economy far as inflationary pressures are concerned. For purposes of comparison, reduced from equations relating changes in selected monetary variable and fiscal variables were run to test the potency of both actions. Results indicate that both policies cause growth of nominal GDP, but fiscal actions are supreme to monetary action as hypothesized. These conclusions should however be taken with caution. This is because of the observation above, that fiscal actions in an economy with an underdeveloped money market would be destabilizing as due to their impact on monetary growth, which brings about inflation. In that regard, reduced form models render themselves in adequate, calling for structural modeling of the monetary sector.