Bank of Uganda

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Successful economic growth in small open economies is dependent upon a high degree of monetary and fiscal policy co-ordination between central banks and fiscal authorities. Indeed, fiscal policy plays a prominent role within macroeconomic policies and a proper analysis of the fiscal measures by central monetary authorities is inevitable. Monetary policy implementation requires taking the impact of fiscal policy into account, which is the case of low income countries in particular. To handle this, the paper introduces a new fiscal block to a benchmark quarterly projection model for monetary policy analyses, based on Berg et al. (2006). The first goal of the paper is to design a simple fiscal block enabling to capture only its basic connection to the economy without complex data requirement, but in a form that can affect and contribute to monetary policy decisions. This approach goes into an opposite direction to many recent models designed to be complex and thus relatively complicated in their fiscal part. The second goal of the paper is to demonstrate the practical usability and applicability of such designed model; for this reason, the model with a fiscal block is applied to Uganda. Despite its simplicity, the model behavior is in line with the economic intuition and historical interpretation, and development of the Ugandan economy over several past years. Additionally, the extension of the model by the fiscal block allows better understanding and proper interpretation of several remarkable periods in Uganda. These particularly involve a fiscal consolidation in mid-2000, fiscal accommodation reacting to the impact of the global crisis on the Ugandan economy, and the recent spending related to hydro-power projects. Moreover, the design of the fiscal block enables a variety of its possible extension in many directions in future.
Fiscal Policy, Fiscal impulse, monetary policy
Musil, K., Mugume, A., & Namanya, C. R. A. (2018). Bank of Uganda.