The effect of oil price shocks on inflation in Tanzania - an autoregressive distributed lag and vector autoregressive approach ∗

K k Saxena; Mohamed Ally Ndule

doi:10.48165/

Authors

K k Saxena Department of Statistics, University of Dodoma, Dodoma, Tanzania.
Mohamed Ally Ndule Department of Statistics, University of Dodoma, Dodoma, Tanzania.

DOI:

https://doi.org/10.48165/

Keywords:

Inflation, Economic growth, Co-integratioN, unit roots, Auto-Regressive Distributed LaG, impulse response functions, Forecast Error Variance Decomposition, macro economy variables, oil price shocks

Abstract

The import for oil in the whole world and particularly in Tanzania is heav ily increasing due to the increasing number of cars, motorcycles, industries, and other machines for their operations. However, the imported oil has been going along with the imported inflation in the country. It is well known that a strong and stable inflation influences the economic growth of a country since it inspires investments, and enhances the consumers to afford purchasing of goods and service and therefore it affects the eco nomic growth of a country. With this background, this study is conducted to examine the oil price shocks and inflation in Tanzania by including macro-economic variables such as crude oil price, inflation rate, exchange rate and GDP. The study employs the Auto Regressive Distributed Lag (ARDL)approach of co-integration to establish a relationship between oil price shocks and inflation. The Vector Auto regression (VAR) approach through the Impulse Response Function (IRF), and Forecast Error Variance Decomposi tion( FEVD)technique are used to examine the impact of oil price changes on inflation and to determine the degree of responsiveness of the inflation rate to shocks using annual data from 1970–2017.The results show that there exists a significant long run positive re lationship between the inflation and the oil price. The results also show a significant long run negative relationship between the inflation and the GDP. In addition, the result from VAR approach reveals that the oil price and the exchange rate has a positive impact on the inflation while the GDP has a negative impact on the inflation. Based on the results of this study it is recommended that the government should find other source of energy to reduce heavily the importation of oil to reduce the inflationary pressure in Tanzania.

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Bulletin of Pure and Applied Sciences Section E - Mathematics & Statistics, Vol. 39 E, No. 2, July-December, 2020

K.K. Saxena and Mohamed Ally Ndule

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