In case of small open economy like Uganda, the conduct of monetary policy faces obstacles to achieve primary goals of price stability, due to high vulnerability to external shocks such as the changes in the international oil prices and weak policy frameworks. Therefore, this paper aims to analyze the effectiveness of monetary policy transmission channels in restraining inflation in case of Uganda for 2000-2017. The Augmented Dickey Fuller shows that all the variables with the exception of interest rate were non-stationary in levels.
The use of a Vector Error Correction Model yields evidence that money supply is the key determinant of high inflation. Additionally, the results suggest the exchange rate channel has a perverse effect on money supply there is also significant no causal relationship from exchange rate, interest rate ad private sector credit to inflation. However, empirical results fail to confirm the existence of relationship from exchange rate channel to any other variable.
The study recommends that the government should regulate money supply so as to reduce inflation. This is because inflation is found to granger cause interest rate and private sector credit