Influence of Interest, Exchange and Inflation Rates on Gross Domestic Product: Case Study of Uganda

Abstract

This study was undertaken with the aim of assessing the influence of inflation rate, interest rate and exchange rate on the Gross Domestic Product, a case study of Uganda. Secondary data was collected from UBOS statistical abstracts from 2001 to 2016. Augmented dickey fuller test Granger Test, Cumulative Periodogram White noise test and normality tests were used. The results from our study show that interest rate, inflation rate and exchange have an imperative influence on the GDP of a country. A higher exchange rate promotes high production of goods and services and thus should be maintained since it makes our exports more competitive and highly demanded on the international market spurring more production. (Bank Of Uganda, 2015) A higher inflation rate was also seen to spur production as producers seek to take advantage of the high prices of goods and services to reap higher profits. This though should be controlled not bring about negative effects like high interest rates . Higher interest rates were found to have a negative effect on GDP. This was attributed to the fact that high cost of credit in a country where investors have to borrow to finance their day to day business operations lessens production. Based on the results attained in the study, an increase leads to a 0.008 decrease in GDP. In conclusion government should strive to keep low interest rates in the country. This will encourage investors to borrow to finance production thus higher GDP. Through its monetary policy, it should strive to make the exchange rate low so that our goods and services may not be priced overseas as compared to goods from other countries. It should keep a moderately high level of inflation so as to give investors the impetus for production. Investors tend to produce more when the price for a good is high and thus greater GDP.