Does inflation matter for financial sector development in Uganda? evidence from autoregressive distributed lag (ARDL) co-integration approach

Abstract

An empirical investigation is undertaken to assess the inflation’s impact on the development of the financial sector (FSD) in Uganda, 1980-2014.Variable M2 was used to measure FSD while Inflation (CPI), Investment, Trade Openness, Government Expenditures, were the control variables used. We employed the econometric technique of Auto Regressive Distributive Lag (ARDL) estimation method. It is found that inflation and FSD have a long run relationship that is negative andthe rate of adjustment at 61 per cent of the variables from short to long run is demonstrated by the Error Correction Term (ECM).Similarly, the study reveals that, a one point increase in inflation results in a drop of 0.076 of FSD.In addition, although we find that government expenditure negatively relates with financial sector development, Investment and trade openness positively relates with financial sector development. Therefore the government should design policies that aim at stabilizing prices with the aim of reducing inflation in Uganda.