Determinants of real interest rates in Uganda: evidence from ARDL bounds testing approach to cointegration

Abstract

This study empirically examines the determinants of real interest rates in Uganda using annual time series data obtained from World Development from 1983 to 2022 using the ARDL. The findings indicated that inflation rate and real effective exchange rates are the long-run determinants of real interest rates while lagged inflation rate, lagged money supply, lagged gross domestic saving and lagged real effective exchange rate are the short-run factors driving real interest rates in Uganda. Based on the above findings, the study recommends policies anchored towards maintaining low levels of real interest rates by implementing inflation targeting monetary policy framework aimed at maintaining low rates of real interest. Also, the government should promote economic activities as a way of fostering economic growth and development as this in turn, will encourage savings and investment thereby levelling down the real interest rates in the economy.

Key Words: Real Interest Rates; Determinants; ARDL; ADF; PP; Uganda