An empirical analysis of the link between fiscal deficits, monetary expansion and inflation in Uganda (2007-2020)

Purpose – This study provides an empirical analysis of the relationship between fiscal deficits, monetary expansion, and inflation in Uganda using quarterly data from 2007 to 2020. It seeks to determine both the short- and long-run drivers of inflation and establish causal relationships among the variables. Methodology – The Autoregressive Distributed Lag (ARDL) bounds testing approach was employed to estimate short- and long-run effects, while Granger causality tests were used to examine causal links. Diagnostic and stability tests were applied to validate the robustness of the model. Findings – The results demonstrate that, in the long-run, money supply (0.33), fiscal deficit (0.28), and exchange rate (0.32) significantly increase inflation, while GDP (–0.27) and interest rate (–0.018) reduce it. Terms of trade were insignificant. In the short run, both fiscal deficit and money supply exert positive and significant effects on inflation. The error correction term indicates that 67% of disequilibrium is corrected within a quarter. Granger causality results confirm unidirectional causality running from fiscal deficit and money supply to inflation. Conclusion – The study concludes that fiscal deficit and money supply are the primary sources of inflation in Uganda, while GDP growth helps stabilize prices. Effective coordination of fiscal and monetary policy is essential. Policymakers should reduce fiscal deficits, regulate money supply, and stabilize the exchange rate, while promoting growth-enhancing strategies to ensure long-term price stability. Keywords: Inflation, fiscal deficit, money supply, ARDL, Uganda JEL Codes: H62, E51, E31