Impact of monetary policy on the economic growth of Uganda

Abstract

Monetary policy tools such as interest rates and money supply play a vital role in maintaining economic stability and promoting growth. This study examines the impact of monetary policy on economic growth in Uganda, focusing on the period from 1993 to 2023. The specific objectives of the study were: (i) to investigate the trend of monetary policy and economic growth during the study period, (ii) to examine the long-run impact of interest rate changes on Uganda's economic growth, and (iii) to analyze the short-run impact of money supply on economic growth. Data for the study were obtained from the Bank of Uganda and the World Bank. The research applied three levels of analysis: univariate, bivariate, and multivariate. Univariate analysis involved descriptive statistics to summarize key variables, while bivariate analysis used Pearson correlation to evaluate the relationships between pairs of variables, including GDP, interest rates, and money supply. At the multivariate level, the study employed the Augmented Dickey-Fuller and Phillips-Perron tests to ensure the stationarity of the time series data. Johansen cointegration tests were conducted to identify long-term equilibrium relationships, and Granger causality tests explored causal links between monetary policy and economic growth. The Autoregressive Distributive Lag model was then used to analyze both long-run and short-run dynamics. Descriptive statistics showed that GDP growth and money supply were near-symmetrically distributed, but GDP growth deviated from normality, requiring robust analytical methods. Pairwise correlations revealed a strong positive link between money supply and GDP growth, while the relationship with interest rates was weak and negative. Stationarity tests confirmed non-stationarity, necessitating advanced models like ARDL, which found money supply to have a significant long-term positive impact on GDP growth. Cointegration analysis showed no evidence of a long-run equilibrium among the variables, emphasizing short-term dynamics. Granger causality indicated a mutual influence between GDP growth and money supply, with interest rates playing a limited role. Overall, the study concluded that money supply is a critical driver of GDP growth, while interest rates had minimal influence, suggesting monetary policy should prioritize money supply management to stimulate economic growth.