Estimated DSGE Models For Monetary Policy Analysis In Uganda

Abstract

This thesis, employs macroeconomic models to empirically examine the effectiveness of monetary policy, its transmission mechanism and their implications on Uganda's business cycle fluctuations. After an overview of monetary policy, the three empirical chapters uses Structural Vector Autoregressive (SVAR), Generalized Method of Moment (GMM) and small open economy New Keynesian Dynamic Stochastic General Equilibrium (DSGE) models augmented with salient features of Uganda's economy to investigate monetary policy questions. The estimated models are utilized to conduct specific monetary policy experiments.Chapter 1 provides an overview of the conduct of monetary policy in Uganda. It elucidate on the evaluation of monetary policy and its transmission mechanisms. To provide empirical evidence of the effectiveness and responsiveness of monetary policy, we employ SVAR and GMM estimation, respectively. The result reveal that the central bank policy rate is an effectiveness instrument of monetary policy and that the monetary policy committees' reaction function can be represented by a simple interest rule. In chapter 2 we turn to the DSGE model to explain the implications of weather driven supply-side shock on output and price fluctuations. It is based on the standard small open economy DSGE model of Gali and Monacelli (2005) augmented into a two sectors where one is characterized by rain-fed agricultural production whereas the other sector comprise of non-agriculture producers using the standard Cobb-Douglas production function. The empirical results reveal that weather shocks affect aggregate output through its effect on agriculture production and relative prices. The impact of weather shock on agriculture is persistent in historical data and over the forecast horizon. Furthermore, monetary policy has limited impact on agriculture output prices in the event of unanticipated weather shock. This coupled with the level of volatility agriculture output prices explains the rational for the policy choice to target core instead of headline inflation. Chapter 3 empirically quantifies the monetary policy trade-off in terms of economic welfare loss attributable to credit market frictions. The results are based on an estimated open economy DSGE model with heterogeneous household and an elaborate financial intermediation framework designed to exposit credit market frictions, following the approach of Sanchez (2016), Kamber and Thoenissen (2013), and Gareli et al. (2010). The model evaluates economic welfare loss inform of large output gap deviation due to credit market friction on the transmission of monetary policy to the real economy. The main result suggest that credit market friction attenuate the effectiveness of monetary policy and widen output gap fluctuations. Credit demand and supply innovation induced by financial intermediaries affect the transmission of policy. Finally, chapter 4 provides the summary of findings, conclusions, and implications from the empirical findings for policy-makers. This chapter also suggest the modifications of the open economy DSGE models suitable for developing countries to guide future macroeconomic research.