Assessing the relationship between the inflation rate and the exchange rate in Uganda between 1995 and 2018

Abstract

The main aim of this research project is to find out the relationship between the inflation rate and the exchange rate over a period from 1995 to 2018.This has been done using various methods but mainly concentrating on Pearson’s parametric test. This was done by using the official mid exchange rate and the official inflationary rate in Uganda. During the methodology, data that was collected was tested for correlation using the Pearson’s parametric test then followed by the Daniel’s test for trend. This was done for both of the variables that were used in this research. Eventually, the granger’s causality test was used to determine whether one variable caused another or not. During the test for correlation by use of the Pearson’s parametric test, the computed value for r was less than tabulated value and hence led us to rejecting the null hypothesis. This showed that there is a significant relationship between the inflation rate and the prevailing exchange rate. With Daniel’s test for trend, it was discovered that both the inflation rate and the exchange rate were not stationary hence a presence of trend. The Granger’s causality test was carried out and it was discovered that neither of the variables, inflation rate and the exchange rate did not have an influence on the other.