Budget deficit and inflation nexus in Uganda 1980–2016: a cointegration and error correction modeling approach

Abstract

Background: One of the principal goals of monetary policy pursued by Central Banks worldwide is virtually price stability. Understanding inflationary dispositions and its determinants is therefore a critical issue from the monetary authorities, scholars and the policy makers viewpoint. The purpose of this paper is to investigate the budget deficit and inflation nexus for Uganda for the period 1980-2016. This is because budget deficit in Uganda has been one of the top topical issues of concern in the country's historical economic problems. The study employs the cointegration and error correction model (ECM) as well as the pairwise Granger causality. This is because the ECM technique has become a tool of choice for estimation and testing the multivariate relationships among the non-stationary data in much of the time series macro-econometrics. Results: Results of the Granger causality test show that budget deficit Granger causes inflation in Uganda at a conventional level of significance. However, no feedback effect is observed. The cointegration results reveal a positive and statistically significant long-run relationship between the series, and the results of the ECM reveal that budget deficit causes inflation in Uganda only in the short run. Further, in Uganda, budget deficit affects inflation directly and indirectly through fluctuations in the nominal exchange rate and money supply. Conclusions: The main conclusion from this analysis is the existence of the longrun relationship among inflation, budget deficit and money supply. This was thus an indication of Granger causality in at least one direction among the variables. However, the impact of trade balance and exchange rate were taken as exogenous. A long-run stationary relationship between the budget deficit, money supply, inflation, trade balance and the exchange rate has been found to hold for Uganda. The major implications for this study are that inflation in Uganda is caused by both monetary as well as fiscal factors. A comprehensive policy package involving budgetary, monetary as well as exchange rate policies is required to deal with inflation.

The Nexus of Government Spending, Price, Output, and Money in the ECOWAS Sub-Region: Evidence from Panel ARDL and Causality Approach

“…The result of short-run causality from government spending to inflation agrees with that of Magazzino (2011) for Cyprus, Italy, Malta, and Spain. It also agrees with the finding of Bwire and Nampewo (2014), Ssebulime and Edward (2019) for Uganda. ∆lnGS -log difference of government spending, ∆lnCPI -log difference of consumer price index, ∆lnGDP -log difference of gross domestic product, ∆lnMS -log difference of money supply.…”

“…This result remains the same with the short run in terms of sign but while these variables are not significant in the short run, inflation on its own is highly significant in explaining government spending dynamics in the long run. This corroborates with the findings of Magazzino (2011) for Portugal; Georgantopoulos and Tsamis (2010) for Cyprus; Olayungbo (2013) for Nigeria; Attari and Javed (2013) for Pakistan; Bwire and Nampewo (2014), and Ssebulime and Edward (2019) for Uganda.…”

“…The causality tests showed that inflation caused economic growth, and economic growth caused government spending. Ssebulime and Edward (2019) modelled budget deficit and inflation nexus in Uganda during the period of 1980-2016. The result established a unidirectional causality where budget deficit Granger-caused inflation, and concluded that government spending was a cause and not the result of inflation in Uganda.…”

“…Among the existing studies on government spending and inflation, a few of the studies captured money or output. Output and money are very important in the determination of government spending and inflation (Aksoy and Melina, 2011;Kia, 2006;Magazzino, 2011;Ozurumba, 2012;Pekarski, 2011;Ssebulime and Edward 2019;Tehranchian et al, 2010).…”

Determinants of local government deficit: evidence from Spanish municipalities

“…Several theories have been postulated for the study of the determinants of debt. Ricardian theory considers that fiscal deficits are not determined by any macroeconomic factor and have no long-term macroeconomic consequences ( Seater 1993 ; Tung, 2018 ; Ahmed and Alamdar, 2018 ; Nwanna and Umeh, 2019 ; Ssebulime and Edward, 2019 ; Usman et al., 2020 ). Keynesian theory establishes a link between fiscal deficits and growth.…”