The link between monetary aggregates and inflation: an empirical study in the case of East African countries
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Date
2010
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Publisher
University of Dar es Salaam
Abstract
This study examined the link between monetary aggregates and inflation in East African countries. The study employed the macroeconometric method to estimate a vector error correction model for East African countries by using quarterly data for the period between 1980Q1 and 2008Q4. Johansen test results on cointegration showed that there exist one and two cointegrating vectors in Kenya and Tanzania respectively, while in Uganda there was one cointegrating vector for equation with M1 and M2 and two cointegrating vectors for M3. Having identified the cointegrating vectors, the dynamic vector error correction model (VECM) is formulated. The results show that there is a weak linkage between money supply and inflation in all three countries. Instead the exchange rate seems to have a close link with inflation in the long run, while in the short run output played a significant role in Kenya and Uganda and inflation inertia and food shortage were strongly influencing inflation in Tanzania. On the other hand, extended broad money supply (M3) seems to have a relative closely link with inflation in Kenya and Uganda, while in Tanzania broad money supply (M2) was relative closely linked to inflation.Therefore, for the three East African countries to control inflation effectively, they need to devise another nominal anchor, and not monetary aggregates which seem to have a weak link with inflation. The available evidence from this study suggests that the exchange rate can be a relatively better nominal anchor.
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Available in print form
Keywords
Inflation, Monetary aggregates, East African countries
Citation
Sanga, M.A (2010) The link between monetary aggregates and inflation: an empirical study in the case of East African countries. Master dissertation, University of Dar es Salaam. Availabe at http://41.86.178.3/internetserver3.1.2/detail.aspx?