Journal of Applied Finance & Banking

Fiscal Deficits Financing: Implications for Monetary Policy Formulation in Uganda

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• Abstract

  The relationship among budget deficit, money creation and inflation in Uganda is analyzed using a triangulation of Vector Error Correction model (VECM) and pair-wise Engel-Granger non- causality test techniques over the period 1999Q4 - 2012Q3. Results suggest that fiscal deficits do not seem to necessarily trigger inflation in the short-run, but in the long-run. Also, unidirectional causality running from inflation to the fiscal deficit, from money supply to the fiscal deficit, and a feedback causal effect between money supply and inflation in the short-run are found. Thus, in the short-term, contractionary monetary policy to reduce inflation in Uganda need not focus on budget deficit reduction, but rather on other macroeconomic determinants of inflation, and inflation should be contained to mitigate its effect on the budget deficit.