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 mechanisms in controlling inflation in Uganda between 2010 and 2024. The main objective was to evaluate how well monetary policy tools influenced inflation outcomes over this period. Specifically, the study sought to (i) evaluate the effectiveness of the interest rate channel, (ii) assess the impact of money supply (monetary aggregates), and (iii) examine the role of the exchange rate channel in influencing inflation in Uganda. The study was motivated by persistent inflation volatility despite the Bank of Uganda’s adoption of the Inflation Targeting Lite (ITL) framework in 2011, which raised concerns about the strength of Uganda’s monetary policy transmission. Under research Methods, the study adopted a longitudinal quantitative research design using secondary time-series data covering the years 2010–2024. Data were sourced from the Bank of Uganda, Uganda Bureau of Statistics, the World Bank, and the International Monetary Fund. Econometric analysis was performed using the Autoregressive Distributed Lag (ARDL) model, supported by Augmented Dickey-Fuller (ADF) and Phillips-Perron unit root tests for stationarity, cointegration tests for long-run relationships, and diagnostic checks for model robustness. Additional techniques, including correlation analysis, Variance Inflation Factor (VIF) tests, and error correction modeling, were employed to ensure the validity of results. For the results, the findings from the ARDL model revealed mixed results across the transmission run (β = –2.3396, p = 0.267) and short run (β = –0.0123 to –0.0463, p > 0.05), but the effects were not statistically significant. The money supply channel also showed negative coefficients in both the long run (β = –13.0492, p = 0.336) and short run (β = –0.1291 to –5.3643, p > 0.1), indicating that monetary aggregates did not significantly influence inflation during the study period. In contrast, the exchange rate channel was significant in the short run, with the one-period lag of the exchange rate positively and significantly affecting inflation (β = 9.8078, p = 0.033), suggesting that depreciation of the Ugandan shilling contributed to higher inflation through import costs. Diagnostic tests, including the Jarque-Bera normality test, serial correlation test, and heteroscedasticity test, confirmed that the model was stable and reliable, with well-behaved residuals and finally, the study concluded that monetary policy transmission mechanisms in Uganda are effective but exhibit varying degreesof influence. The interest rate and exchange rate channels remain strong determinants of inflation, while money supply growth continues to pose inflationary risks. It is recommended that the Bank of Uganda enhances policy credibility and responsiveness by strengthening forward guidance, improving coordination with fiscal policy to reduce domestic borrowing pressures, and maintaining a stable exchange rate through targeted interventions. Furthermore, enhancing financial sector development and broadening credit access could improve the transmission of interest rate adjustments to the wider economy, thereby making monetary policy more effective in sustaining low and stable inflation.