Analysis of the Effect of Uganda’s 2011 Government Spending Shock on Key Macroeconomic Variables

Abstract

Economic theory suggests that when an economy experiences a government spending shock, it reacts in a specific manner. This paper tests this supposition by analyzing the response of Uganda’s aggregate output, inflation and real policy interest rates to the country’s 2011 government spending shock, in contrast with what the AD/AS economic model suggests. The analysis indicates that following the shock, all the aforementioned economic variables responded in line with the model’s stipulations, and the economy experienced a crowding out effect on net exports.

Keywords: government spending shock, AD/AS model, policy interest rate, inflation rate, aggregate output, GDP, government expenditure

DOI: 10.7176/JESD/10-6-11

Publication date:March 31^st 2019