Statistical Analysis for Demand for Money Model in Sudan (1971-2010)

Abstract

Studies on the stability of money demand functions have received prominent attention in the literature. This is due to the importance of having stable money demand functions for economic predictions to ensure long- term economic stability. Although these functions are not the only tools for monetary policy formulation, they play an important role in the assessment of the effectiveness of monetary policy in an economy. The stability of the money demand function is crucial in that a stable money demand function would mean that the quantity of money is predictably related to a set of key economic variables linking money and the real economic sector. Therefore, this will help central banks to select appropriate monetary policy actions. The main objective of this study is to estimates and examines the stability of the demand for broad and narrow money ( ) in Sudan using annual data over the period 1971-2010. Applying recently developed econometric techniques of cointegration and error correction methodology. The main hypothesis is that the demand for money function has a stable behavior during the period of the study. Also there exist long-run relationships between the monetary aggregates and their determinants as well as the short dynamics of the demand for money functions have the slow speed of adjustment to equilibrium. EViews software is used to empirically test these hypotheses. The main results suggest that; the money demand function in Sudan is stable over the period of the study. Moreover, for equation the results indicate that the long-run demand for real money ( ) is positively affected by real income (GDP), and all the rest of variables. The coefficients of these variables carry the expected signs and all these variables are significant in long-run. The results of ( ) equation indicate that the long run income elasticity is positive and in agreement with the economic theory. The other variables behave in the manner suggested by money demand theory. The coefficients of these variables carry the expected signs and all these variables are significant in long-run. Moreover the sings of these variables were consistent with the economic theory. The results of the short-run model for equation shows that the sing of the error correction term is consistent with the theory and statistically significant. However, the results of equation suggest that the real GDP coefficient did not have the expected sign but it is significant. Also the Exchange rate coefficient has the expected sign and significant, beside that, the short-run coefficient of Interest rate has the right sign but it is not significant. The coefficient of inflation rate has a negative sign and it is significant. For equation the error-correction term is statistically significant and has the expected sign. In addition, the real GDP coefficient did not have the expected sign but it is significant. In addition to that, the Exchange rate coefficient carries out the right sign and significant, also, the coefficient of Interest rate has the right sign but is not significant. The inflation rate coefficient has the right sign and significant. Finally the study has identified several areas where further studies could be conducted in order to improve the quality of the results. Constructing and using the divisia index aggregate could yield a better proxy for monetary aggregate. The other notable area is broader monetary aggregate such as may provide a more stable function in Sudan.