Transmission mechanism of monetary policy in Uganda
No Thumbnail Available
Date
2013
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
University of Dar es Salaam
Abstract
In July 2011, the Bank of Uganda (BOU) abandoned the Reserve Money Programme (RMP) in favour of the inflation targeting lite as its monetary policy framework. As the BOU continues to reform its monetary policy framework, it is imperative to understand the underlying monetary policy transmission mechanism and ultimate effects on final policy goals, such as; output and inflation. The main objective of this study, therefore, is to identify the active transmission channel(s) of the monetary policy in Uganda. The focus is on three channels of transmission; interest rate, exchange rate and bank lending; and the empirical investigation covers the period 1994-2010, on a quarterly basis. The SVAR methodology is used to empirically achieve the set objective. The results from the estimated SVAR indicate that the exchange rate channel is the most active among the three monetary policy channels investigated. The results show that monetary policy shocks have minimal effect on the bank lending rate, rendering the interest rate channel weak. The study finds no evidence on the existence of the bank lending channel in Uganda. The dominance of the exchange rate channel implies that the Bank of Uganda should design and implement monetary policy with special attention given to the exchange rate to ensure output and price level stability. The evidence of a weak interest rate channel and insignificant bank lending channel affirms the small size of the formal financial sector and the imperfectly competitive banking sector in Uganda. The study recommends further exploitation of the widely accessible mobile phone technology as a solution to the aforementioned impediments to financial sector growth, which would in turn strengthen the transmission mechanism of the monetary policy.
Description
Available in print copy
Keywords
monetary policy, transmission mechanism, uganda
Citation
Abigaba, M.L.(2013). Transmission mechanism of monetary policy in Uganda. Master dissertation, University of Dar es Salaam. Available at (http://41.86.178.3/internetserver3.1.2/search.aspx?formtype=advanced)