Journal of Statistical and Econometric Methods

Inflation Dynamics in Uganda: The role of disequilibria in the money and traded goods markets

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  • Abstract

    This paper models inflation dynamics in Uganda using a error correction model. The long-run equilibrium relationships in the money market and external sector are estimated, and the two error-correction terms integrated into a short-run single equation error correction model. Consistent with the predictions of a small open economy model, money supply, exchange rate, foreign inflation, terms of trade and real output have a cointegrating relationship with inflation.. In the short- run, inflation is driven by changes in real output, monetary aggregates, the exchange rate, and foreign prices. The disequilibria in the money and traded goods markets is significant but the adjustment process is slow. The significance of the interest rate differential in the money-demand equation implies some degree of monetary policy effectiveness in influencing aggregate demand.

    JEL Classification: E5; E31; F41; O55
    Keywords: Inflation dynamics; Money market disequilibrium; Traded goods market disequilibrium; Cointegration; Error correction model; Uganda