Abstract
<p><em>Economic Planners, monetary policy custodians and civil society in Uganda often disagree on the target for inflation when their development objectives are not harmonised. When development economists argue for increased deficit spending in support of infrastructure development and capital accumulation, they are challenged in regards how much pressure the development budget should put on likely macroeconomic stability, particularly where inflation could rise above the inflation target. This paper examined the effect of inflation on economic growth in Uganda and evaluates the equilibrium rate of inflation in the country, given the macroeconomic environment.</em><em></em></p><p><em>Using the threshold model</em><em> </em><em>and data for the period 1991-2017 it is established that</em><em>:</em><em> a) below 7.3</em><em> </em><em>percent inflation level, the relationship between inflation and economic growth is positive and inflation is not harmful to growth, while at levels above 7.3 percent, inflation was detrimental to economic growth and the relationship become negative; b) at economic growth rates above 7.8 percent, inflation was an incentive for further growth, yet at economic growth rates below 7.8 percent per annum, increases in inflation served as a dis-incentive to economic growth. Therefore Uganda in the current conditions is better off maintaining inflation below 7.3 percent as long as the anticipated economic growth is 7.8 percent.</em></p>
Highlights
Over the last decade or so Uganda government has been seeking to develop a private led economy where private investment and export growth drive economic growth through the national development plans and poverty eradication programmes
At very high economic growth rates above 7.8 percent, inflation is an incentive for further growth
When growth is below 7.8 percent per annum, increases in inflation serves as a dis-incentive to economic growth
Summary
Over the last decade or so Uganda government has been seeking to develop a private led economy where private investment and export growth drive economic growth through the national development plans and poverty eradication programmes. Attaining a sustained output growth rate capable of delivering the country to middle income status in the medium to long-term was the real sector goal of the country’s national development plans (Republic of Uganda, 2015). At the same time it has pursued a monetary policy goal of macroeconomic stability with the inflation targeting framework in the recent years. 1.1 Macroeconomic Stability and Economic Growth The primary objective of monetary policy in Uganda over the recent years has been to attain low and stable inflation. When output is at its potential, and inflation and inflation expectations are at objective levels, the monetary conditions are at neutral levels and do not constrain or stimulate aggregate demand and inflation In this case real interest rate would be at the neutral rate
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