The role of foreign financial variables on domestic money demand revisited The case of sudan :

Abstract EN

This paper estimates the effect of foreign financial variables in addition to the traditional macroeconomic variables such as price level, real income and interest rates on money demand in Sudan by applying the bounds testing approach to annual data over period 1970-2008.

The results of the bounds test reveal at least three cointegration relations among the variables.

The ARDL model results indicate that money demand is significantly influenced by real output, nominal exchange rate and domestic interest rate in the short run while by real output and domestic interest rate in the long run.

The significant and negative coefficient of nominal exchange rate variable implies the existence of currency substitution phenomenon in the Sudan.

Additionally, the negatively signed and significant error-correction term suggests that approximately 18% of total disequilibrium in real money demand was being corrected in each quarter in Sudan.

JEL classification: E41 ; F41