The effect of volatility of real effective exchange rate on trade in Uganda (1984-2019)

Abstract

The overall objective was to determine the effect of exchange rates volatility on the trade in Uganda using the nonlinear auto regressive distributed lag (NARDL) model. The study specifically investigated the effect real effective exchange rate volatility, inflation rate and GDP Per Capita on trade in Uganda both in the short run and the long run. The study explained the summary (descriptive statistics) at the univariate level while Nonlinear ARDL technique was employed at multivariate level respectively. The ARDL bounds test revealed the presence of a long run relationship among the variables. The nonlinear ARDL model revealed that one period lagged trade balances one period lagged positive changes in real effective exchange rate volatility significantly affect trade in the long run whereas one period lagged positive changes in real effective exchange rate volatility and positive changes in GDP Per Capita were found to have a statistically significant impact on trade in the short run. Inflation rate was found to have no significant impact on trade both in the short run and long run. The study concluded that the government should encourage agriculture modernization, adopt import substitution and export promotion strategies, adopt efficient inflation-adjusting and reducing strategies, aim at investing in the human capital and health follow the flexible exchange rate regime where the real interest rate is determined by the global market forces of demand and supply. The study concluded that real effective exchange rate volatility and GDP Per Capita influence trade whereas Inflation rate does not influence trade.