Exchange rate unification and economic development: The case of Uganda, 1987–92

Abstract

This study assesses the feasibility and sustainability of exchange rate unification in Uganda. A hybrid model originating from Pinto (1989) and Elbadawi (1990) is constructed to suit Uganda's conditions. The model is used to study the key variables in the size and behavior of the premium in the process of exchange rate unification and the sustainability of a market-based exchange rate. The model is then tested on monthly data for 1987–1992. Three results emerge: (a) the exchange rate premium varied directly with the money supply; (b) the real effective exchange rate varied inversely with the premium; and (c) external import support reduced the premium's absolute size, but as foreign resources dried up, the premium reemerged. The paper then examines development policy implications of the results.