Effect of inflation on economic growth in Uganda between 1994 and 2019
Nyiiro, Sydney Ngobi
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This study investigated the effect of inflation on economic growth in Uganda from 1994 to 2019. The major aims were to determine whether there’s a short run and long run relationship between inflation and economic growth as well as the existence of a causal relationship between inflation and economic growth. Time series data was gotten from the World Development Indicators (WDI) sourced from the World Bank to which Augmented Dickey Fuller (ADF) tests, Ordinary Least Squares (OLS) and Granger Causality tests were run to establish stationarity and the relationship between inflation and economic growth. The regression and correlation analyses revealed a significant positive relationship between inflation and economic growth in Uganda. There was evidence of a significant long run relationship between inflation and economic growth though no significant short run relationship was found in the study. The study also found that economic growth has a significant causal effect on inflation. As a result of the significant long run relationship between inflation and economic growth, government should aim for moderately high inflation rates (4-6%) which can encourage investment and economic growth but should be willing to step in with inflation mitigating policies like the Inflation Targeting Lite (ITL) regime because high economic growth rates cause an increase in inflation which could grow to unsustainable levels leading to macroeconomic instability which is undesirable. Further studies can consider the effect of other macroeconomic variables on economic growth such as interest rates, exchange rates and export performance, as well as using different datasets like quarterly data or considering multiple similar countries like the East African region.