Does the Keynesian Theory Matter on Economic Growth? Insights from Tanzanian Economy

Abstract

The present study examines the validity of the Keynesian theory on economic growth in Tanzania from 1966 to 2022. Secondary data for the current study were collected from the Bank of Tanzania (BOT) database. The theoretical framework of this paper was based on the Keynesian model. For the empirical examination, the study employs advanced econometric techniques such as the ADF and Phillips-Perron (PP) unit root tests, the Johansen cointegration test, and the Error Correction Mechanism (ECM). The results exposed that all the variables (GDP, grants, recurrent and development expenditures and tax revenues) were non-stationary at the level and stationary at the first difference. Cointegration results indicate there is a long-run association ship between grants, recurrent expenditure, development expenditure, and tax revenues on economic growth. Long-run results indicate that grants, recurrent expenditure, development expenditure, and tax revenues have a positive effect on economic growth and variables are statistically significant at the 5% level of significance. This suggests that the Keynesian theory is supported in the Tanzanian economy. The results of the ECM indicate that grants, recurrent expenditure, and tax revenues are converging towards equilibrium at the speed of 5%, 13%, and 20% per annum, except for development expenditure. Therefore, the present study recommends that since the Keynesian theory has been supported, fiscal policy activities in the economy should be enhanced to boost the economy. Furthermore, non-distortionary taxes should be maintained when expanding the tax base. Fiscal policy activities should stimulate economic growth.

Keywords: Keynesian theory, economic growth, Error Correction Mechanism, Variance Inflation Factor and Tanzanian Economy