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EXCHANGE RATE MISALIGNMENT AND FINANCIAL LIBERALISATION: Exchange Rate Misalignment and Financial Liberalisation: Empirical Evidence and Macroeconomic Implications for Uganda, 1993-2004

David Kihangire and Charles Abuka
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Charles Abuka: PhD

International Finance from University Library of Munich, Germany

Abstract: This study empirically investigates Uganda’s equilibrium real exchange rate (EREER) during 1993M1 to 2004M12. Using ARDL approach to cointegration, we find that a long-run relationship exists between Uganda’s REER and its determinants, driven largely by trade balance, openness, fiscal deficits, and capacity utilization. Consequently, we estimated a long-run EREER model. Comparing the actual REER and the EREER reveals that Uganda’s REER is overvalued over the recent period, 2003-2004. The macroeconomic financial costs of this overvaluation are found to be quite high for the Ugandan economy. Policy-wise, the results suggest that appropriate policy must aim at avoiding exchange rate overvaluation in support of external macroeconomic stability.

Keywords: Exchange Rate Misalignment; Exports; Uganda; equilibrium exchange rate; Overvaluation. (search for similar items in EconPapers)
JEL-codes: F3 F4 (search for similar items in EconPapers)
Pages: 19 pages
Date: 2005-05-31
Note: Type of Document - doc; pages: 19. This is a working paper, which will appear in Bank of Uganda Staff Papers, 2005
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