Abstract:
The objective of the study is to examine the existence of a long and short run relationship between inflation and it is determinants (GDP growth, money supply, domestic investment, exports, and cost of finance) in Sudan. Three control variables are included in the analysis, namely, exchange rate, government spending, and foreign direct investment. The study depended on annual time series data covering the period (1980-2014), which are collected from the Central Bank of Sudan and Central Bureau of Statistics. In addition, the study used Auto Regressive Distributed Lag (ARDL) approach associated with Error Correction Method (ECM). The results indicated that real GDP and investment have negative effect on inflation in the long run, while exports and money supply have positive effect on inflation. With regard to control variables, the result indicated that exchange rate and government spending have positive effect on inflation. In addition, the results indicated that real GDP, investment and money supply have positive effect on inflation in the short-run, while exports has a negative effect on inflation. With regard to control variables, the result indicated that exchange rate, foreign direct investment and government spending have positive effect on inflation in the short run; since money supply and exchange rate are considered to be among the key determinants of inflation in Sudan. The results showed that the adjustment coefficient (EC-1) has a negative sign and statistically significant, these findings indicated that the presence of error correction mechanism operates in this model. Also, the coefficients of EC-1 are equal to (-1.74), which imply that deviation from the long-term inflation is corrected by only 174% in the model. The study calls for reducing the inflation through adopting suitable monetary and fiscal policies
