Effects of monetary policy on exchange rate in Uganda.

Abstract

The main objective of this study was to examine the effect of monetary policy on exchange rate in Uganda. The specific objectives of the study were to establish the Short Run and the Long Run relationship between real interest rate and Exchange Rate fluctuations in Uganda. The study used World Bank (World Development Indicators) data from 1990 to 2020 and adopted the autoregressive distributed lag (ARDL) model. The ARDL model was used since the variables are integrated of different orders. In this study, it was found out that changes in real interest rate do not effect changes in exchange rate. Decrease in interest rate should lead to depreciation in exchange rate making foreign goods and services more expensive. This should lead to an increase in exports and inflation in the economy. However, based on our results, it seems the case that lower interest rates instead increase domestic investment hence constraining the inflow of goods in to the country.