Time Series Analysis Of Oil Price Shocks And Inflation In Tanzania- An Ardl And Var Approach

ABSTRACT 

Oil is essential raw materials in running daily economic activities in Tanzania. The importation of oil in the country is heavily increasing due to the increasing number of cars, motorcycles, industries, and other machines which need oil for their operations. But the imported oil has been going along with the imported inflation in the country. It is assumed that the strong and stable inflation influence economic growth of a country since it inspires savers, investments, and enhance consumers to afford to purchase goods and service and therefore influence the economic growth of the country. However, due to the role of oil in Tanzania, a researcher is highly interested to examine the Times series data of 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 employed ARDL approach of co-integration to establish relationship between oil price shocks and inflation, Vector Autoregressive (VAR) approach through IRF and FEVD to examine the impact of oil price shocks on inflation, and also it employed coefficient of elasticity to determine the degree of responsiveness of inflation rate to shocks using annual data from 1970- 2017. The result from ARDL showed that there exists a significant long-run positive relationship between inflation and oil price. The result also showed a significant long-run negative relationship between inflation and GDP. Also, the result from a VAR approach revealed that oil price and exchange rate have a positive impact on inflation, while GDP has a negative impact on inflation. Based on the results of this study it is recommended that the government should find another source of energy to reduce the heavy importation of oil so as to reduce the inflationary pressure in Tanzania