Macro-Economic Determinants of Money Supply in Uganda

Abstract

The study investigated an economic analysis of macroeconomic determinants of money supply in Uganda for the period 2008 – 2018. Specifically, the study sought to find out the effect of exchange rate, examined the effect of central bank rate, analyzed the effect of interest rate (lending rate), determined the effect of inflation rate and it lastly estimated the effect of stock of gov’t treasury on money supply for Uganda using a data set of annual observations spanning from 2008 to 2018 which was obtained from the Bank of Uganda Website, this data is updated and released by BOU every year before the reading of the National Budget in April. The series for money supply appeared to be unceasingly increasing over time period 2008-2018 showing higher inflationary tendencies in the economy. Results showed that except for CBR, exchange rate and inflation unveiled a significant relationship with money supply (p<.05) in that exchange rate was positively related to money supply, Likewise, inflation and money supply exhibited a significant relationship (p<.05), additionally, inflation rate was strongly negatively related to the money supply suggesting that money supply increases as inflation in the economy declines. Further, the regression results showed that there was a statistically significant positive association between central bank rate, exchange rate, governments’ stock of treasury and money supply. A statistically significant positive association between exchange rate and money supply was an unsurprising finding, however, there was a statistically insignificant positive association between central bank rate and money supply for the period 2008-2018. The three single most important macroeconomic aggregates that determine money supply in the Ugandan economy were exchange rates, interest rates and stock of government reserves. However, in order to increase the amount of money supply in the economy, it requires that government holds some foreign exchange reserves, keep the interest rates required for investment low and finally ensure that inflation levels are maintained at less than 5% in the economy.