A model of monetary policy in Uganda

Musinguzi, Polycarp (1991) A model of monetary policy in Uganda. University of Southampton, Doctoral Thesis.

Abstract

The overall objective of the thesis is to model the main channels of monetary policy in Uganda. The aim is to facilitate not only an examination of the state, conduct, transmission, role, effectiveness and long-run implications of monetary policy in the high-inflation developing dual `war-torn' Ugandan economy but also short- to medium- term quarterly macroeconomic forecasting. The shortcomings of the financial modelling strategy and the portfolio balance approach of Tobin and Brainard (1971) are analysed and a new approach is developed. The preference for drawing inference on the `best' specific dynamic simultaneous-equations model, using the more efficient nonlinear 3SLS, is discussed. Bank of Uganda financing of the government budget deficit through Ways and Means advances is examined and the role of the monetary authorities in influencing portfolio behaviour is explored. Further government intervention in determining the structure and level of nominal interest rates and in bridging the gap between the parallel `Kibanda' market and official exchange rates is analysed. An examination of financial sector - real sector linkages is more revealing than an isolated examination of the financial sector based on a quarterly model during 1981 Q1 - 1988 Q1. The external influence of the IMF and the World Bank on monetary policy is quantified. Political and economic regime structural shifts are analysed. In addition to a full multicollinearity analysis, an influential analysis is conducted to locate influential data points corresponding with quarterly IMF Conditionality and the governments' economic policy reforms. The model also captures the balance of payments position, external debt servicing burden and financing gaps. The impotence or adverse nature of most within- and across- equation effects of the policies and reforms reflect the costly mistakes of relying on the IMF global or continent-wide macroeconomic forecasting models and pinpoint monetary targets. It also reflects the underlying structural rigidities in the economy, poor management and other institutional weaknesses. The usefulness of the `best' specific dynamic system derives from the practical use of the quarterly model as an adequate and credible short- to medium- term policy - oriented forecasting device.

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