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

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  method to measure uncertainty. Secondly, the Autoregressive Distributed Lag  methodology is used to estimate three risk-augmented monetary aggregates: base money, broad money  and broad money . The results show that economic uncertainty has no effect on real base money and real broad money  in the short run; but has a negative effect on real broad money . 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.