Food prices, money growth and informal cross-border trade: evidence from Uganda

The purpose of this paper is to examine the potential role of money supply and agricultural informal cross-border trade (ICBT) in Uganda's food price processes.
The econometric analysis is based on two separate but complementary approaches: vector error correction modeling and Granger causality testing.
The results indicate that long-run domestic food prices adjust to money supply, agricultural output and exchange rate movements. However, the findings do not provide sufficient evidence to support the proposition that agricultural ICBT is an important long-run driver of food price in Uganda. The pair-wise Granger causality test results reveal a unidirectional causality from food prices to agricultural output; unidirectional causality from money supply to food prices; bidirectional causality between food prices and nominal exchange rates; unidirectional causality running from rainfall to food prices; and unidirectional causality running from agricultural ICBT to agricultural output.
Understanding the underlying drivers of food inflation is critically important because food prices are critically important for food security, social stability and general household welfare.
The major innovation in this paper is attempt to model demand side determinants of food prices by focusing on the role of money and ICBT.