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Mr. Andrew Berg
and
Mr. Rafael A Portillo

Abstract

Monetary policy in sub-Sahara Africa (SSA) has undergone an important transformation in recent decades. With the advent of sustained growth and generally stable fiscal policies in much of the region, many countries are now working to modernize their monetary policy frameworks. This book provides a comprehensive view of the many monetary policy issues in sub-Saharan Africa. It reflects an effort to fill a gap in the current literature and collects research by staff of the IMF and other institutions, as well as from policymakers within central banks in SSA. The chapters explore the many dimensions of monetary policy in SSA. This volume will serve as an important reference for academics and policymakers and will inform future policy debates. The book highlights two points, one policy-related and the other methodological. Although these countries differ in important ways from advanced and emerging market countries, the monetary policy issues they face are not fundamentally different from those faced elsewhere. Policy aims to provide an anchor for inflation over the medium term while also responding to external and domestic shocks. Likewise, Sub-Saharan African countries are in the process of modernizing their policy frameworks, by clarifying their objectives and improving their operational frameworks, making policy increasingly forward-looking and improving their forecasting and analytical capacity.

Mr. Xavier Debrun
,
Ms. Catherine A Pattillo
, and
Mr. Paul R Masson
This paper develops a full-fledged cost-benefit analysis of monetary integration, and applies it to the currency unions actively pursued in Africa. The benefits of monetary union come from a more credible monetary policy, while the costs derive from real shock asymmetries and fiscal disparities. The model is calibrated using African data. Simulations indicate that the proposed EAC, ECOWAS, and SADC monetary unions bring about net benefits to some potential members, but modest net gains and sometimes net losses for others. Strengthening domestic macroeconomic frameworks is shown to provide some of the same improvements as monetary integration, reducing the latter’s relative attractiveness.
Mr. Andrew Berg
,
Ms. Filiz D Unsal
, and
Mr. Rafael A Portillo
Many low-income countries continue to describe their monetary policy framework in terms of targets on monetary aggregates. This contrasts with most modern discussions of monetary policy, and with most practice. We extend the new-Keynesian model to provide a role for “M” in the conduct of monetary policy, and examine the conditions under which some adherence to money targets is optimal. In the spirit of Poole (1970), this role is based on the incompleteness of information available to the central bank, a pervasive issues in these countries. Ex-ante announcements/forecasts for money growth are consistent with a Taylor rule for the relevant short-term interest rate. Ex-post, the policy maker must choose his relative adherence to interest rate and money growth targets. Drawing on the method in Svensson and Woodford (2004), we show that the optimal adherence to ex-ante targets is equivalent to a signal extraction problem where the central bank uses the money market information to update its estimate of the state of the economy. We estimate the model, using Bayesian methods, for Tanzania, Uganda (both de jure money targeters), and Ghana (a de jure inflation targeter), and compare the de facto adherence to targets with the optimal use of money market information in each country.
Mr. Edward F Buffie
,
Mr. Stephen A. O'Connell
,
Ms. Catherine A Pattillo
, and
Mr. Christopher S Adam
Since the turn of the century, aid flows to Africa have increased on average and become more volatile. As a result, policymakers, particularly in post-stabilization countries where inflation has only recently been brought under control, have been increasingly preoccupied with how best to deploy the available instruments of monetary policy without yielding on hard-won inflation gains. We use a stochastic simulation model, in which private sector currency substitution effects play a central role, to examine the properties of alternative monetary and fiscal policy strategies in the face of volatile aid flows. We show that simple monetary rules, specifically an (unsterilized) exchange rate crawl and a 'reserve buffer plus float'-under which the authorities set a time-varying reserve target corresponding to the unspent portion of aid financing and allow the exchange rate to float freely once this reserve target is satisfied-have attractive properties relative to a range of alternative strategies including those involving heavy reliance on bond sterilization or a commitment to a 'pure' exchange rate float.
Mr. Shanaka J Peiris
and
Régis Barnichon
This paper explores the sources of inflation in Sub-Saharan Africa by examining the relationship between inflation, the output gap, and the real money gap. Using heterogeneous panel cointegration estimation techniques, we estimate cointegrating vectors for the production function and the real money demand function to recover the structural output and money gaps for seventeen African countries. The central finding is that both gaps contain significant information regarding the evolution of inflation, albeit with a larger role played by the money gap. There is no significant evidence of asymmetry in the relationship.
Mr. Jean-Claude Nachega
This paper uses cointegration analysis to investigate the empirical relationship among money, prices, income, and a vector of interest rates in Uganda from 1982 to 1998. Despite the substantial financial market liberalization that has taken place in the early 1990s, quarterly time-series data confirm that a stable relationship prevailed among real broad money, income, and domestic and foreign interest rates. The empirical results indicate income homogeneity, a strong own-rate-of-return effect, a high degree of international capital mobility and asset substitutability, and demonstrate that both domestic and foreign factors are important determinants of inflation in Uganda.
International Monetary Fund. Research Dept.

Abstract

The World Economic Outlook, published twice a year in English, French, Spanish, and Arabic, presents IMF staff economists analyses of global economic developments during the near and medium term. Chapters give an overview of the world economy; consider issues affecting industrial countries, developing countries, and economies in transition to market; and address topics of pressing current interest. Annexes, boxes, charts, and an extensive statistical appendix augment the text.

International Monetary Fund. Research Dept.

Abstract

Les Perspectives de l'économie mondiale (PEM) présentent des analyses de l'évolution économique mondiale à court et moyen termes, préparées par les principaux économistes du FMI. Elles constituent une ressource respectée, centrale et fiable d'informations fouillées et équilibrées, permettant aux décideurs et aux dirigeants du monde entier de prendre le recul nécessaire. Publiées deux fois par an, les Perspectives de l’économie mondiale présentent sous une forme claire et pratique les perspectives en matière de croissance, d’inflation, de commerce international et d’emploi, et s'intéressent également à d'autres domaines économiques. Chaque numéro des PEM se penche sur les problèmes qui touchent les pays avancés, émergents et en développement. Les banques centrales, les économistes, les institutions financières, les chefs d’entreprises, les gouvernements, les groupes de réflexion et les chercheurs attendent avec impatience cette étude sans pareille de la situation actuelle et de ce qui se prépare.