The Efficiency of Tanzanian Macroeconomic Policies in Adhering to Its International Budget Constraints

Abstract

This study used yearly time series data for imports and exports from 1976 to 2018. These data were obtained from the International Monetary Fund (IMF) data portal. The present paper analyzes whether Tanzanian total imports and total exports share a long run relationship which means testing if they are cointegrated or not. The implication is that if exports and imports share the long run relationship (cointegrated), then the Tanzanian macroeconomic policies are not violating country’s international budget constraints. On the other hand, if the two time series variables are not cointegrated, then Tanzanian macroeconomic policies are in violation of its international budget constraints. The series for both variables were found to be integrated of order one i.e. I(1). Thus, the two variables are not stationary in their levels but were found stationary in their first difference. The residuals saved from the estimated long run) equation (cointegration regression between the two variables were found to be stationary at 5% significance level which suggests the existence of long run relationship (cointegration) between total imports and total exports in Tanzania. Moreover, the error correction model (ECM) results suggested that exports have more impact in correcting disequilibria in imports since about 26.49% of the disequilibrium in imports are corrected each year. Also, findings show that about 16.43% of the disequilibrium in exports are corrected each year. On the other hand, a bidirectional causal reference was found between the two variables based on causality results of the specified ECM. Keywords: International budget constraints, Cointegration, Error correction model, Macroeconomic policies, Exports, Imports DOI: 10.7176/JEP/11-24-10 Publication date: December 31 st 2020