The Effect of Real Effective Exchange Rate Volatility on Uganda’s Trade Balance (1993-2015)

The Effect of Real Effective Exchange Rate Volatility on Uganda’s Trade Balance (1993-2015)

Dennis Mahebe1 ,Francis Wasswa2 and Willy Kagarura3

1Economist, National Planning Authority (NPA), Kampala-Uganda;
2Senior Lecturer, School of Economics, Makerere University, Kampala-Uganda;
3Senior Lecturer, School of Economics, Makerere University, Kampala-Uganda.

Journal of Modern Economy

This paper investigated the effect of Real Effective Exchange Rate (REER) volatility on Uganda’s Trade Balance for the period 1993Q4 to 2015Q4 by employing the GARCH and ARDL methodology. The ARDL results revealed a negative relationship between the trade balance and the volatility of the real effective exchange rate in the short run. The Impulse Response Function results show evidence of the J-Curve on Uganda’s Trade Balance. Also, the results on the REER indicate that the Marshal-Lerner Condition holds for Uganda’s case. The study therefore recommends that developing a well-developed hedging facility like forward markets and institutions is critical in protecting exporters against exchange rate risk in the short run by reducing volatility of the real effective exchange rate with the aim of improving Uganda’s trade balance.

Keywords: REER-Volatility, Trade Balance, GARCH, ARDL, J-Curve, Marshal-Lerner Condition

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How to cite this article:
Dennis Mahebe ,Francis Wasswa and Willy Kagarura. The Effect of Real Effective Exchange Rate Volatility on Uganda’s Trade Balance (1993-2015). Journal of Modern Economy, 2020,3:10. DOI: 10.28933/jme-2019-12-2205


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