The determinants of inflation in Sudan 1970-2002

Abstract EN

The main objective of this paper is to explain the causes of inflation in Sudan using information during 1970, Q1 - 2002, Q4.

The analytical framework views inflation as responding to disequilibria in the internal and external sectors of the economy.

Results confirm the existence of stable equilibrium relationships in the money and foreign exchange markets, which tend to govern the price level in the long run.

In particular, the external sector’s disequilibrium is found to matter most signifying a strong long-run impact of foreign price and exchange rate on inflation, with slow adjustment to equilibrium.

Inflation is also found to be perpetuated by feedbacks from the short-run nominal exchange rate, foreign price, drought shocks and deterioration in expectations.

Money growth does not appear to affect inflation in the long run, but the elasticity of inflation to the short-run money supply is significant and high.

The findings suggest that a monetary-cum-exchange rule is more suitable for inflation control in Sudan while maintaining external competitiveness.

Fighting inflation also depends on the ability of policy to reduce the effects of supply shocks emanating from droughts and foreign price movements, which negatively affect the costs of production inputs.