Determinants of exchange rate in Uganda (1995-2017)

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Kampala International University, College of Economics and Management
The rate of fluctuation of exchange rate in Uganda has been on a rise and this prompted a research (study) to examine the major determinants and also analyze the real effective exchange rate. This study focuses on three major objectives which are; to examine the effect of exports on exchange rate, to examine the effect of inflation on exchange rate and to examine the effect of interest rates on exchange rate in Uganda. The study involved the use of quantitative research approach using secondary data for the period 1995-2017. Several diagnostic tests were conducted to determine the econometric properties of the variables such as multicollinearity, autocorrelation, heteroscedasticity, and stationary. Tests on heteroscedasticity indicate that there was constant variance in the series since the P-value 0.0656 >0.05 there by concluding that there’s homoscedasticity, while the autocorrelation test provided evidence of serial correlations in the residuals. Tests on stationary indicated that there was stationary in the variables inflation and interest rates whereas exports and exchange rate were non stationary at first levels which were later differenced once to make them stationary, in addition the multicollinearity test indicated that there was no multicollinearity in the data set. In order to establish the relationship between exchange rate and the independent variables, a multiple linear regression model was fitted for the stationary variables and the results indicate that there was a negatively significant relationship between exchange rate and exports with P value (0.006<0.05), and an insignificant relationship between exchange rates, inflation and interest rates with all their P values >0.05. Therefore, the government to stabilize exchange rates, specific policies should be put in place for example reduce on inflation rates through fiscal and monetary policies, increase interest rates so as to increase the value of the home currency and also promote exportation of Ugandan products through creating a favorable investment environment this increases the value of the shilling against foreign currencies on the world market thereby reducing on the rise of the exchange rate.
A Research Report Submitted to Department of Economics and Applied Statistics in Fulfillment of the Requirements for the Award of the Degree of Bachelor of Science in Statistics at Kampala International University
Exchange rate, Uganda