Determinants of Demand for Tradable Commodities in a Small Open Economy: a Case of Diesel in Uganda

Abstract

In this research paper, attempts are made to identify determinants of demand for diesel in Uganda. The study estimates diesel demand using time series data starting from 1981 to 2010. The primary objective of this study is to investigate the determinants of demand for diesel in Uganda. In addition it estimates demand elasticity for diesel in Uganda using time series econometric techniques. Accordingly, the study used a double logarithm model to investigate this issue together with a list of tools of analysis such as vectors error correction model, which uses the impulse response function and variance decomposition model to show the response of variables to shocks. The study also investigated both short run and long run elasticities for per capital income and price. The results from the study identified only four major variables that were the major drivers of demand and these include; price of diesel, number of diesel consuming vehicles, real foreign exchange rate and real price of diesel. These factors were responsible for high demand in the long run and in short run apart from the number of diesel consuming vehicles which was only significant in the long run. The results from co integration revealed a maximum of only six co integrating equations and the error correction models showed time of adjustment of variables to given shocks. Real per capita income and real price of diesel could stabilize with given shocks in the long run. The price elasticity of demand and income elasticity of demand were in contrary with expected signs.