Economic Uncertainty and Money Demand Stability in Uganda during Financial Liberalization: A GARCH and ARDL Approach

Allan Kayongo and Asumani Guloba

Applied Economics and Finance, 2018, vol. 5, issue 4, 70-86

Abstract: This paper examines the impact of economic uncertainty on money demand stability in Uganda during financial liberalization. First, an economic uncertainty index is created using the Generalized autoregressive conditional heteroscedasticity (GARCH) method to measure uncertainty. Secondly, the Autoregressive Distributed Lag (ARDL) methodology is used to estimate three risk-augmented monetary aggregates: base money, broad money M2 and broad money M3. The results show that economic uncertainty has no effect on real base money and real broad money M2 in the short run; but has a negative effect on real broad money M3. However, economic uncertainty negatively affects all monetary aggregates after one quarter. This is because economic agents diversify their portfolio from just holding money, into other forms like: long term accounts; foreign accounts; treasury bills and bonds; property; mortgages and land. The three money demand balances are also stable.

Keywords: economic uncertainty; money demand stability; financial innovations (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (1)

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