Multivariate Time Series Model in Forecasting Gross Domestic Product Growth, Inflation, and Foreign Direct Investment in Tanzania

Abstract

The purpose of this study is to use time-series econometric methods, specifically Vector Autoregression (VAR) models, to predict the growth of Tanzania's Gross Domestic Product (GDP), Inflation, and Foreign Direct Investment (FDI) using annual data from 1991 to 2020. The research finds that there is a Granger causality between GDP and FDI, largely due to increased private investment and consumption. However, there is no Granger causality between inflation and GDP or FDI. The study predicts that inflation will remain stable but may experience occasional spikes due to supply-side shocks. Additionally, the study anticipates that FDI will continue to increase due to ongoing reforms aimed at improving the business climate and attracting more overseas investments. The model diagnostic test shows no autocorrelation and a stable model. Finally, the study forecasts that both GDP and FDI will continue to rise due to major sectoral projects taking place in Tanzania. This information is useful for policymakers and investors who can use it to make informed decisions and manage the risks associated with economic growth and development in Tanzania.