An empirical investigation is undertaken to
assess the inflation’s impact on the development of the
financial sector (FSD) in Uganda, 1980-2014.Variable
M2 was used to measure FSD while Inflation (CPI),
Investment, Trade Openness, Government Expenditures,
were the control variables used. We employed the
econometric technique of Auto Regressive Distributive
Lag (ARDL) estimation method. It is found that inflation
and FSD have a long run relationship that is negative
andthe rate of adjustment at 61 per cent of the variables
from short to long run is demonstrated by the Error
Correction Term (ECM).Similarly, the study reveals
that, a one point increase in inflation results in a drop of
0.076 of FSD.In addition, although we find that
government expenditure negatively relates with financial
sector development, Investment and trade openness
positively relates with financial sector development.
Therefore the government should design policies that
aim at stabilizing prices with the aim of reducing
inflation in Uganda.
Keywords : Financial Sector Development, ARDL, M2, Inflation, Uganda.