Evaluating the Effectiveness of Monetary Policy Transmission Mechanisms in Controlling Inflation in Uganda (2010–2024)

Abstract

This study examined the effectiveness of monetary policy transmission in controlling inflation in Uganda between 2010 and 2024, focusing on the interest rate channel. The study was motivated by persistent inflation volatility despite the Bank of Uganda’s Inflation Targeting Lite framework adopted in 2011, raising concerns about the strength of monetary policy transmission. A longitudinal quantitative design using secondary time-series data (2010–2024) was adopted. Data were sourced from the Bank of Uganda, Uganda Bureau of Statistics, the World Bank, and IMF. The Autoregressive Distributed Lag (ARDL) model was used, supported by Augmented Dickey-Fuller (ADF) and Phillips-Perron tests for stationarity, cointegration tests, and diagnostic checks. Correlation analysis, Variance Inflation Factor (VIF) tests, and error correction modeling ensured result validity. The ARDL model showed that the interest rate channel had a negative but statistically insignificant effect on inflation in both the long run (β = –2.34, p = 0.267) and short run (β = –0.0123 to –0.0463, p > 0.05), indicating limited immediate impact on price stability. Money supply also showed no significant effect, while the exchange rate was significant in the short run (β = 9.81, p = 0.033), suggesting depreciation of the shilling raised import costs. Diagnostic tests confirmed model stability and reliable residuals. Monetary policy transmission in Uganda affects inflation through varying channels, with the interest rate channel showing limited short- and long-term influence. Strengthening policy credibility, enhancing forward guidance, and improving financial sector development are recommended to improve the effectiveness of interest rate adjustments in stabilizing inflation.