Effect of inflation rate on domestic private investment in Uganda

Abstract

This comprehensive study investigates the intricate relationship between inflation and domestic private investment in Uganda from 1983 to 2021. Utilizing the ARDL bounds testing approach, the research analyses both long-run and short-run effects of inflation on domestic private investment. The study employs a robust empirical framework, including diagnostic tests and statistical techniques to ensure the reliability of the results. The descriptive statistics reveal a consistent pattern among variables, supporting the reliability of the dataset. Pairwise correlation analysis indicates no perfect multicollinearity, ensuring the validity of the regression model. Unit root tests establish the integration order of variables, confirming the suitability of the ARDL bounds testing approach. Estimating the ARDL model, the study observes a cointegrating relationship among variables, reinforcing the existence of a long-run equilibrium. Diagnostic tests, including Ramsey Reset and stability checks, affirm the model's robustness and appropriateness for forecasting. The goodness of fit, measured by R-squared, attests to the model's explanatory power, with variables collectively influencing domestic private investment. Results highlight the negative long-run impact of inflation on domestic private investment, emphasizing the importance of stable prices for economic growth. Real effective exchange rate exhibits a negative effect on investment in the long run but a positive impact in the short run, reflecting nuanced dynamics. GDP per capita positively influences domestic private investment in the long run, yet negatively affects it in the short run, signaling potential resource misallocation. Population growth positively affects domestic private investment in the long run but exhibits a negative influence in the short run, indicating complexities in demographic factors. General government final consumption expenditure displays a negative long-run impact but positively influences investment in the short run, reflecting mixed effects of government spending. Inflation, though insignificantly impacting domestic private investment in the long run, exhibits a positive influence in the short run, suggesting policy accommodation. The study concludes with policy recommendations, advocating for a balanced approach to inflation management, targeted government spending, and measures to enhance economic stability. Acknowledging limitations, the research paves the way for future studies to explore regional perspectives and alternative estimation methodologies, fostering a more comprehensive understanding of the inflation-domestic private investment relationship.