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The relationship between growth in monetary aggregates and price changes continues to be a subject of considerable debate both in the academic and policy circles. Whereas the more ‘conservative’ policy makers hold that growth in monetary aggregates bear proportionately on prices, ‘liberals’ on the other hand suggest a fairly weak relationship and instead mainly attribute sustained price changes to other innovations (including structural weaknesses and poor productive capacity).This study employed vector autoregression techniques (and its variants) to examineboth short term as well as long term interactions between selected macroeconomicaggregates with particular focus on the relationship between money growth and price changes. Results from both the reduced form vector autoregression specification and the contemporaneous structural vector autoregression show a weak causation from growth in monetary aggregates to price changes, but the link between changes in monetary aggregates and prices becomes stronger in the long run. The results also point to a strong relationship between price changes on the one hand and exchange rate depreciation, and past inflation outcomes on the other. The results imply a potential for increased revenue from monetisation, at least up to some feasible as well as the need to focus on other possible sources of price variations.In general, whereas it is possible for the relationship between prices and money toweaken, budget deficits beyond ‘certain financeable limits’ will clearly negate thepossibility of attaining other objectives of macroeconomic policy. A natural concern that arises in such a context is one of sustainability and compatibility of the budget deficit with other macroeconomic targets. We also employed the governmentbudget accounting framework to analyse sustainability of Uganda’s current fiscalstance.The results show that the consolidated deficit is consistent with attainment of target outcomes for other macroeconomic variables, most notably the rates of inflationand GDP growth rates. The inflation target has however, been achieved at the cost ofan unsustainable domestic debt.From a policy perspective, issuing domestic debt at such a high real interest rates willallow lower money growth but at the cost of future increases in debt service obligations and thus future budget deterioration.

Keywords: fiscal stance ; macroeconomic aggregates ; structural vector autogression ; budgetaccounting approach ; EPRC

Subject(s): Agricultural Finance

Financial Economics

Labor and Human Capital

Production Economics

Productivity Analysis

Issue Date: 2010-06

Publication Type: Report

PURL Identifier:

Total Pages: 38

JEL Codes: H62; H63; H69

Series Statement: Research Series


Record appears in: Economic Policy Research Centre (EPRC) > Research Reports

Autor: Hisali, Eria


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