Fiscal deficits financing: Implications for monetary policy formulation in Uganda

The relationship among budget deficit, money creation and inflation in Uganda is analyzed using a triangulation of Vector Error Correction model (VECM) and pair-wise Engel-Granger non- causality test techniques over the period 1999Q4 - 2012Q3. Results suggest that fiscal deficits do not seem to necessarily trigger inflation in the short-run, but in the long-run. Also, unidirectional causality running from inflation to the fiscal deficit, from money supply to the fiscal deficit, and a feedback causal effect between money supply and inflation in the short-run are found.