Economic determinants of nominal effective exchange rates in Uganda (1985 - 2019)

Abstract

The factors driving the nominal effective exchange rate have become an important subject matter that has generated significant debate due to swerving results to the economic determinants of the nominal effective exchange rate. This study provides the empirical analysis of the factors determining the nominal effective exchange rate in Uganda over the period 1985 – 2019 using the Autoregressive Distributed Lag model. The study findings showed that while the inflation rate and lending interest rate determine the nominal effective exchange rate in the long run, the lagged nominal effective exchange rate, inflation rate, and lagged inflation rate determine the nominal effective exchange rate in the short run in Uganda. The study argues the government to persistently implement an accommodative monetary policy that keeps inflation at a single-digit unit. The government through the central bank should buy or sell government securities to give or get liquidity in banks thus influencing the interest rates and thereby contributing greatly to the nominal effective exchange rate. Key Words: Nominal Effective Exchange Rate; ARDL; Uganda