Monetary aggregates and private sector credit growth in tanzania: a causality and elasticity analysis

Abstract

This study investigates the relationship between monetary aggregates and private-sector credit growth in Tanzania, focusing on the direction of causality and the magnitude of long-run effects. Using quarterly data and employing Granger causality tests alongside the Autoregressive Distributed Lag (ARDL) error correction model, the study examines the influence of narrow money (MN), broad money (BM), and extended broad money (EBM) on credit dynamics. The results reveal that narrow money and broad money significantly Granger-cause private sector credit, indicating a leading role of liquidity in driving credit expansion. Meanwhile, extended broad money, although not causally predictive, exhibits the strongest long-run elasticity. These findings confirm the importance of money supply in Tanzania’s credit market and highlight that broader liquidity sources, including institutional and foreign currency deposits, are essential for long-term credit growth. The study recommends that policymakers prioritize the management of both narrow and broad monetary aggregates to enhance credit access and support private sector-led development.