COINTEGRATION WITH STRUCTURAL BREAKS MONEY DEMAND, INCOME, INTEREST RATES AND EXCHANGE RATE MODELS:

IMPLICATIONS FOR EFFECTIVENESS OF MONETARY POLICY IN UGANDA

Abstract

The study investigated the dynamic relationships between money demand, income, prices, real effective exchange rates, and the savings, lending, discount and deposit rates in Uganda using a modified ARDL model catering for cointegration and structural breaks.  It was established that: cointegration with structural breaks existed in all cases; monetary policy is not effectively transmitted through lending rates but is effectively transmitted through the savings, deposit and discount rates in the short-run as well as the saving and deposit rate in the long-run; the exchange rate transmission channel is effective both in the short-run and in the long-run;  after accounting for structural breaks, the equations for all the variables are stable except that for deposit rate which is partially stable; money demand has an inelastic positive effect on income in the long-run only, has an inelastic positive effect in the short-run but an elastic positive effect in the long-run on price; increasing the saving rate is a more effective means of increasing income in Uganda; and that the discount rate has a negative inelastic effect on money demand and income in the long-run.  It is recommended that: continuous studies to determine the most effective monetary policy transmission channel(s) be conducted regularly by monetary authorities as a rule in all countries; and efforts to address the shortcomings devised on a continuous basis.