THE IMPACT OF MONETARY POLICY ON INFLATION CASE STUDY FOR UGANDA FROM 2000 TO 2018

ABSTRACT

The study explored the impact of monetary policy on inflation in Uganda from the year 2000 up

to 2018. The specific objectives of the study were; to analyze trend of inflation in Uganda, to

examine the stationarity of monetary policy indicators and inflation in Uganda and to examine

the relationship between monetary policy indicators and inflation in Uganda. The study adopted

exploratory, descriptive explanatory, case study, cross sectional research designs. The study used

the indicators of monetary policy such as interest rate, government expenditure, lvii and M2

were used as the independent variables in this study. monetary policy transmission mechanism as

the route by which mQnetary policy gets transmitted into the economy. Modern quantity theorists

of the neo classical school of economic thought see inflation as a monetary phenomenon that

arises from a more rapid expansion in the quantity of money than in total output. This study used

general formulation of inflation in Uganda.INF = (M~ ER, CRB, EG, GEX TO); Where INF

represent inflation, M represents monetary variables which is a combination of two monetary

aggregates CMi, M2), ER represents exchange rate, CRB represents credit bank ratio, EG

represents economic growth, GEX represents government expenditure and TO represents trade

openness. Using the Augmented Dickey-Fuller (ADF) test for stationarity, unit root tests were

carried out for each variable. The ADF-Test was used on series in level and in the 1st difference.

Conclusions about stationarity were made by comparing the ADF-Statistic and the Critical

values (C.V) at 1, 5 and 10 percent. When the ADF-Statistic is greater in absolute terms than the

critical value, the series is said to be stationary and the reverse implies non-stationarity. There

was upward movement behavior of inflation from 2000 to 2018. The government through central

bank should increase the exchange rate. This makes imports more expensive thus reducing on the

inflation arising from trading countries.

The study used secondary data from IMF and World Bank. The study was analyzed using SPSS,

Excel and STATA whereby summary statistics about the variables was presented. The analysis

part involved stationarity and linearity tests about the variables. The study found out the data

about Interest rate using the Test Statistic (-5.260) had more negatives than the 5 ~ critical value

(-3.000). Thus the data about interest rate is stationary for quit period of time. Also, Mi and M2

have got Test statistic values of (-3.803 and -5.984) respectively are all greater than the 5%

critical value (-3.000) in terms of negatives. Therefore, the data about monetary aggregates that

is Ml ané M2 is stationary since the null hypothesis is accepted at 5% level of significance.

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