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

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.This study provides new empirical evidence on how different forms of the money supply shape private-sector credit growth in Tanzania, a key driver of investment and economic expansion. By combining Granger causality tests with an ARDL error correction approach, the research demonstrates that changes in narrow and broad money reliably precede movements in credit, underscoring the importance of liquidity conditions in the short run. At the same time, broadened money, capturing a wider range of deposit sources, exerts the strongest long-run influence on credit growth, highlighting the structural role of deeper financial resources in sustaining lending. These findings offer actionable insights for monetary authorities: effective credit expansion requires coordinated management of both immediate liquidity and long-term monetary depth. The study therefore strengthens evidence-based policymaking for financial sector development and supports efforts to foster a more robust, private sector-driven economy in Tanzania.