Free Access | March 2015

Inflation Dynamics And Agricultural Supply Shocks In Uganda

Authors/Editors: Joseph Mawejje ,  Musa Lwanga

Abstract:

We estimate the contribution of agricultural supply shocks to inflation in Uganda. Using monthly data for the time period January 2000 to December 2012, we develop an empirical model for inflation processes in Uganda. The model is estimated as a single equation that includes lagged vector error correction terms from the money, external, and domestic agricultural markets. We include in our model a measure for shocks to the agricultural sector, the agricultural output gap, estimated as the monthly deviations of realized from potential agricultural output. The analysis is augmented by a VAR model that allows us to account for inflation persistence. Results indicate that disequilibria in the money, external and agricultural sectors feed into the Ugandan inflation process in the long run. Importantly, the agricultural sector is one of the important sources of inflation in the short run. Our findings have important implications for policy in Uganda. Specifically, policies geared towards improving agricultural productivity on the one hand and limiting supply rigidities on the other will be crucial in controlling inflation in Uganda.