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Impact of government domestic borrowing on monetary policy rate pass-through in Tanzania

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  • Mwakalila, Enock

Abstract

The central bank should be able to play a role in an economy through monetary policy. Controlling the interest rate is a key monetary policy instrument the central bank uses. Increasing government borrowing from domestic commercial banks in Tanzania may counteract this instrument and its intended impact. Thus, this study empirically analyzes how government debt to commercial banks affects the transmission of monetary policy rates to lending rates in Tanzania. Quarterly time series data is collected from 2010 to 2023. Autoregressive Distributed Lag (ARDL) Model estimation with a bound cointegration test is used to establish the short and long-run relationship, and the results are subjected to diagnostic tests for robustness. The results show that increasing government borrowing from domestic commercial banks prevents the trickle-down effect of the monetary policy (repo) rate on lending rates. Therefore, the study recommends that the government reduce domestic borrowings to fund its budget deficit, especially spending on projects that the private sector can implement better.

Suggested Citation

  • Mwakalila, Enock, 2025. "Impact of government domestic borrowing on monetary policy rate pass-through in Tanzania," Journal of Policy Modeling, Elsevier, vol. 47(1), pages 150-165.
    • Handle: RePEc:eee:jpolmo:v:47:y:2025:i:1:p:150-165
    DOI: 10.1016/j.jpolmod.2024.10.003
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    Keywords

    Monetary Policy Rate; Bank Lending Rates; Interest Rate Pass-Through; Government Debt Intervention; Time Series Analysis; Tanzania;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C82 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Macroeconomic Data; Data Access
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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