Exchange Rate and Inflation in Uganda for The Period 1990 - 2018

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TABLE OF CONTENTS

DECLARATION

APPROVAL

DEDICATION:

ACKNOWLEDGEMENT iv

TABLE OF CONTENTS

LIST OF TABLES viii

LIST OF ACRONYMS ix

ABSTRACT x

CHAPTER ONE 1

BACKGROUND OF THE STUDY 1

1.0 Introduction 1

1.1 Historical Background 1

1.1.2 Conceptual Background 4

1.2 Problem Statement 4

1.3 Objective of the Study 5

1.3.1 Main Objective 5

1.3.2 Specific Objectives 5

1.4 Research Hypothesis 5

1.5 Significance of the Study 6

1.6 Scope of the Study 6

1.6.1 Theoretical Scope 6

1.6.2 Content Scope 6

1.7 Operational Definition of key terms 7

1.8 Conceptual framework 8

CHAPTER TWO 9

LITERATURE REVIEW 9

2.0 Introduction 9

2.1 Theoretical review 9

2.1 .1 Traditional flow model 9

2.1.2 Monetary theory 9

2.2 Empirical revie~v .10

2.2.1 Relationship between real exchange rate and inflation rate 10

2.2.2 Relationship between Nominal exchaiige rate and inflation rate 13

2.2.3 Causation between real exchange rate and inflation rate 14

CHAPTER THREE 17

RESEARCH METHODOLOGY 17

3.0 Introduction 17

3.1 Research Design 17

3.3 Data processing and Analysis 17

3.4 Model specification 18

3.4.1 Bivariate analysis 18

3.5 Model Specification 18

3.6 Ethical Consideration 19

3.7 Limitations 19

CHAPTER FOUR 20

DATA PRESENTATION, ANALYSIS AND INTERPRETATION OF FINDINGS . . ..20

4.0 Introduction 20

4.1 Testing Time series Data 20

4.1.1 Normality test 20

4.1.2 Unit root test for the variables 21

4.2 Relationship between inflation and real exchange rate 21

4.3. Relationship Between Nominal Exchange Rate and Inflation 22

4.4: Overall model summary 23

4.5 Causation between inflation and exchange rate 24

4.5.1 Causation between inflation and realexchange rate 25

CHAPTER FIVE 27

DISCUSSION OF THE FINDINGS, CONCLUSIONS AND RECOMMENDATIONS

5.0 Introduction 27

5.1 Discussion of the findings 27

ABSTRACT The effect of exchange rate on inflation of Uganda was studied from 1990 -2018 guided by the following specific objectives; to find out the relatiOnship between nominal exchange rate and inflation rate in Uganda, to find out the relationship between real exchange rate and inflation rate in Uganda and to find out the causation between exchange rate and inflation in Uganda. The study employed a descriptive research design which involved determining the relationships between the variables of the study by using regression analysis. Time series data of inflation, real exchange rate and nominal exchange rate and exchange rate was used as far as this study was concerned. The findings of the study revealed that there is a positive relationship between exchange rate and inflation, the same was also for nominal exchange rate and inflation. This implies that as real exchange rate increases , inflation also increases .The multiple linear regression model revealed also revealed that only real exchange rate was significant. The study further established that there is a bi- directional granger causality between inflation and real exchange rate, inflation and nominal exchange rate and generally inflation and exchange rate. Hence exchange rate depends on inflation and inflation depends on exchange rate. The study, recommended that; the government should formulate favorable policies like regulating capital inflows and encouraging exports as this can reduce instability in real exchange rate since it causes inflation which has a negative implication on the economic growth of the country, the government should formulate favorable policies like promOting currency evaluation that can control instability in Nominal exchange rate since it greatly causes inflation. The government should also formulate policies that can control inflation like adjustment in taxation as it also causes exchange rate and currency evaluation should also be promoted by boosting exports to regulate exchange rate.

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Exchange Rate and Inflation in Uganda for The Period 1990 - 2018

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