Time Series Analysis of Uganda’s Real Effective Exchange Rate

Abstract

There have been efforts by the Central Bank of Uganda to regulate Exchange Rate of the Ugandan Shilling against the US dollar. It’s for this reason that the main aim of this study was to carry out a time series analysis of Uganda’s Real Effective Exchange Rate and specific objectives were to (establish time series properties, fit the appropriate time series model and forecast the Real Effective Exchange Rate series) The researcher used secondary data for the years 2010-2018. In order to do the analysis the variable (REER), a forecasting method called Autoregressive Integrated Moving Averages popularly known as the Box-Jenkins (BJ) methodology was used. It involved determination of the distribution, fitting an appropriate model and forecasting of the REER series. Through the Box- Jenkins methodology a candidate model (4, 1, 1) was generated and proven through the diagnostic check based on its potentials for better prediction and computational requirements. On completion of the above procedures of analysis, it was discovered that Real Effective Exchange Rate series were positively trended for the years 2010-2018. The positive trend is not good for the country because it shows depreciation in Uganda’s currency against the US dollar. Depreciation of Uganda’s Real Effective Exchange Rate makes Uganda’s imports more expensive than before. If the imports are not reduced or the volume and value of exports are not improved, this has serious effect on the balance of payment. According to the forecast values for the months of April to December 2018, there was a positive trend in the Real Effective Exchange Rate Figures. It’s therefore suggested that the Central Bank put in more effort to come up with measures that stabilize Real Effective Exchange Rate.