Monetary transmission mechanisms and monetary policy assessment in Sudan 1970-2015

Abstract EN

The present study investigates the monetary transmission mechanisms and assesses the monetary policy in Sudan; it focuses essentially on examining whether the channels of the exchange rate or the changes altering the monetary base due to monetization of the deficit and bank lending are the appropriate transmission mechanisms.

Based on empirical models the study illustrates the effects of the monetary policy on the real sector.

Moreover, it also analyzes the dynamics of inflation in Sudan.

This study examined monetary transmission mechanism channels in Sudan using a monthly data covering the period 1998/1-2015/5, in addition to annual data over the period 1970-2014, the results obtained confirmed that it takes about 13 months for changes on money to be reflected in the general price level in a system of equations (namely Bayesian BVAR, ARDL, and VECM).

About 67% of the exchange rate adjustments were immediately (spontaneously) reflected in the general price levels indicating a strong exchange rate transmission mechanism.

Output growth played a crucial role in reducing inflationary pressures, the results failed to reject the null that money growth does not granger cause inflation or exchange and vice versa(1) .

Moreover, both claims on government and credit (finance) to private sector granger cause inflation.

The impulse responses derived from the models clearly visualized the monetary transmission mechanisms, which can be traced as monetization of deficit that led to high growth of claims on government and eventually accelerating monetary expansion, which in turn represented a major cause behind exchange rate depreciation and inflationary pressures.