Foreign Direct Investment Response to Monetary Policy Tools Fluctuations in Tanzania

Foreign Direct Investment (FDI) has emerged to be a pivotal for economic growth. In this regard, this study examined the nexus between FDI and monetary policy fluctuations in Tanzania. Methodologically, a time series study from 1960 to 2023 using the World Bank and Bank of Tanzania data, Interest Rate Parity theory, Autoregressive Distributed Lag (ARDL) and Vector Autoregressive (VAR) models with EViews 12software where the Augmented Dickey-Fuller (ADF), Phillips tests Lag selection criteria—Akaike Information Criterion (AIC), Schwarz Information Criterion (SIC), Hanna-Quinn Criterion (HQC), Final Prediction Error (FPE), Breusch-Godfrey Serial Correlation LM, Jarque-Bera, Granger Causality, Impulse response function, CUSUM and CUSUM of square tests were done. This study found long and short-terms relationships among variables where the key determinants of FDI include the positive impact of previous FDI, negative effects of the Consumer Price Index (CPI), mixed impacts of exports and external debt stock, and the influence of foreign aid, GDP, and GNP growth rates. Imports and money supply positively affect FDI, while the official exchange rate, tariff rates, and trade openness show mixed impacts. The discount rate positively impacts FDI, with non-significant negative effects from reserves and treasury bills yield. The Granger Causality Test indicates relationships between the discount rate and FDI, and between FDI and reserves. The VAR model indicates a positive impact of trade volume on FDI, with trade volume responding immediately to shocks and FDI showing a delayed response. This study recommends controlling inflation, encouraging exports, management of external debt and proper use of foreign aid.