The Relationship between Inflation, Bank Credit, and Economic Growth: The Case of Uganda

Abstract

This thesis explores the relationship among inflation, bank credit, and economic growth in the case of Uganda using data obtained from the World development indicators from 1983- 2015. The variables used are Gross Domestic Product for economic development, consumer prices as the annual percentage of the GDP for inflation rates and domestic credit to the private sector by banks for bank credit. The thesis applies the unit root tests (Augmented Dickey-Fuller, Phillips – Perron and the Kwiatkowski–Phillips–Schmidt–Shin test) to test the stationarity of the variables, cointegration test to investigate the long run relationship between the variables, Vector Error Correction Model (VECM) to determine the short run and long-run relationship and lastly the Granger causality to determine the direction of Inflation, Bank credit and Economic growth. VECM results indicate a negative long-run relationship between inflation and economic growth and also a long run negative relationship between bank credit and economic growth in Uganda. This adds to the available literature on the study of inflation, bank credit and economic growth in the world and its uniqueness in the results of the negative relationship between bank credit and economic growth which is a rare case. Also, the results would enable the policymakers in Uganda to make the right decisions to enable the development of the country as well as ensure that the negative relationship between bank credit and economic growth does not adversely affect the country‟s economy. Keywords: Inflation; bank credit; economic development; Uganda

Öz: Bu tez Uganda‟da 1983-2015 yılları arasında enflasyon, banka kredileri ve ekonomik kalkınma arasındaki uzun dönemli denge ilişkisini incelemektedir. Bu tezde kullanılan değişkenler sırasıyla gayri safi yurtiçi hasıla, enflasyon oranları ve özel sektöre sağlanan banka kredileridir. Hata düzeltme modeli sonuçlarına göre enflasyon, banka kredileri ve ekonomik büyüme arasında uzun vadede negatif ilişki bulunmuştur. Bu tezden elde edilen sonuçlara göre Uganda‟nın ekonomik kalkınması için öneriler tartışılmıştır. Anahtar kelimeler: Enflasyon; banka kredileri; ekonomik kalkınma; Uganda