Exchange rate volatility–economic growth nexus in Uganda

ABSTRACT

The global financial crisis has disrupted trade and capital flows in most developing economies, resulting in an increased volatility of exchange rates. We develop an autoregressive distributed lag model to investigate the effect of exchange rate volatility on economic growth in Uganda. Using data spanning the period 1960–2011, we find that exchange rate volatility positively affects economic growth in Uganda in both the short run and the long run. However, in the short run, political instability negatively moderates the exchange rate volatility–economic growth nexus. These results are robust to alternative specifications of the economic growth model.

KEYWORDS:

• Exchange rate volatility
• economic growth
• Uganda

JEL CLASSIFICATION:

• C32
• E44
• F31
• F43

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ The results based on a measure of realized volatility (LVOL) where the annual volatility is obtained as the sum of log squared monthly returns are fairly similar and hence are not reported here. They are available from the corresponding author on request.

Additional information

Funding

This work was supported by the AusAID [grant number ADS1102456].