The determinants of inflation in Uganda: (2000-2018)

Abstract

The study set out to examine the determinants of inflation in Uganda using Quarterly time series data on the Ugandan macroeconomic variables for 2000-2018. This period incorporated all policy measures put in place within the past two decades to capture the determinants of inflation in Uganda. The study specifically sought to investigate the impact of exchange rates (ER) and money supply (M2) on inflation and the relationship between the private-sector credit and inflation in Uganda. The study used Error Correction Model (ECM) to analyze the behaviour of macro-economic variables during the period under review. Monetarists’ theory of inflation was also adopted as a framework to guide the investigation. The study findings indicate that the money supply and exchange rate significantly impact inflation in Uganda. This resonates with the monetarist theory, which contends that inflation is a monetary phenomenon and can be produced only by a more rapid increase in the quantity of money than in output. The study also found a positive relationship between private sector credit and inflation in Uganda. It was recommended that a comprehensive policy package be considered to deal with inflation; these are budget, monetary as well as exchange rate policies. There is need for vigorous measures to fast-track the development of domestic capital market but in the same way adopt a restrictive but relatively flexible monetary policy in which the supply of money is constrained to grow steadily. Since money growth is greatly influenced by the expansion of credit, there is need to limit government borrowing to finance deficits.