A RE-EXAMINATION OF THE DEMAND FOR MONEY IN UGANDA: NATURE AND IMPLICATIONS FOR MONETARY POLICY

The existence of a stable relationship between money and prices is generally regarded as a prerequisite for a monetary targeting framework. The stability of such a relationship is assessed via a money demand function. A stable money demand function ensures that the impact of monetary policy is predictable and that monetary policy actions are consistent with the desired objectives of price stability and long-run growth. This paper uses contemporary empirical methods to model the demand for money. In particular, cointegration analysis is used to establish the existence of a long-run relationship and the short-run dynamics are modeled via the error correction model. Using quarterly data for the period 1990 to 2004, the study establishes that both real base money and real M2 are positively related to real GDP (with the income elasticity of 1.5 and 1.0, respectively), and negatively related to the relative interest rate and the nominal exchange rate (with the interest rate elasticities of – 0.01 and –0.2 and the exchange rate elasticities of –1.2 and –0.9 for the real base money and real M2 models, respectively. The short-run models vindicate the existence of cointegrating relationships. For the real bas