Download inflation modeling for the sudan 1970-2002

UNIVERSITY OF KHARTOUM
Faculty of Economics and Social Sciences
Department of Econometrics and Social Statistics
INFLATION MODELING
FOR THE SUDAN
1970-2002
By: Jihan Hazim Habib
Supervisor: Dr. Kabashi M. Suliman
A thesis submitted in partial fulfillment for the requirement of the degree of
MASTER SCIENCE (M.S.c)
IN
Econometrics & Social Statistics
February 2004
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DEDICATION
TO MY MOTHER
TO MY SISTERS
TO MY BROTHERS
TO MY SUITOR ABDO
TO MY UNCLE DR. FAREED A. ATABANI
CUSIN DR. BIDOUR ABO AFFAN
I dedicate this Research
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ACKNOWLEDGEMENT
First of all I would like to express my due thanks and gratitude to my Supervisor
Dr. Kabashi M. Madani who provided valuable supervision and guidance
without which this work would not attain the present shape.
Also my much thanks to my extended Family.
My appreciation also extended to Research, Policies and Statistics Administration
Staff Bank of Sudan and the Library of BOS for their continuous help.
My thanks also extended to National Income Accounting DepartmentBureau of Statistic, for supplying me with valuable and relevant information.
Special thanks and gratitude for
Mr.Emad Khatmi & Mr. Makram Sedeeg
.
Finally for every one read this research
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Contents
Contents
Dedication
Acknowledgement
Contents
List of Tables and Graphs
Abstract in Arabic
Abstract
Chapter One : General Framework of the Study
1.0 Prelude
1.1 Research Problem
1.2 Objective of the Study
1.3 Research Hypothesis
1.4 Methodology of Data Collection
1.5 Data Sources
1.6 Organization of the Study
Chapter Two: Historical Background
2.1 Theoy of Inflation
2.2 Causes of Inflation in Sudan (1970-2002)
Chapter Three: The Empirical Model
3.1 Theoretical Background
3.2 Literature Reviews
3.3 Data Methodology and Specification Model
Chapter Four: Empirical Results
4.0 Preface
4.1 Results of the Analysis
4.2 Stability Test
Chapter Five: Conclusion and Recommendations
5.1 Conclusion
5.2 Recommendations
References
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List of Tables
Table
2-1 Growth Rate of Money Supply.
2-2 Sharing of Some Economics Sectors
2-3 Growth Rate of Exchange Rate.
4-6 Augmented Dickey – Fuller Unit Roots.
4-8 Granger Causality Test.
4-9 Stability Test.
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List of Graphs
Graph
2.1 Keynesian Approach (Aggregate Supply & Demand)
2.2 Phillips Carve
4.1Graph Series Inflation in Sudan 1970-2002
4.2 Auto- Correlation Graph for Series
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Abstract
Identifying the causes of inflation is important and elusive problem, requiring
frequent re-examination and discussion. The factors responsible for inflationary
pressure still remain to be discovered. It has been an actual challenge to many
economists and the decision makers. The explore such issues an empirical and
analytical methodological approach is adopted.
The inflationary process in Sudan has started since the beginning of the seventies.
In the last decades the inflationary process had flourished. In1978, Sudan adopted
a set of measures to liberalize the economy. These measures generated a sustained
upward price trend .official statistics show that the inflation rate was about 75%
for year 1989 compared to about 2.3% for the year1970. In the early 1990
inflation reached unprecedented levels. This sudden increase was mainly due to
the policies adopted to liberalize the economies are inflationary, abolition of
official price controls and government subsidies. But in the last years the inflation
rates are started decreasing, which in 2002 the rate of inflation it reach 8.33%.
That may be due to effectively unify the exchange rate in1998.
The methodologies pursued in this study have applied different estimation
techniques. Least Squares Methods is used to estimate the models individually,
besides these, advance econometric techniques such as co-integration, unit root
tests and causality test. The data have been analyzed by using statistical software
package E-Views.
The study is organized into five chapters organized as follows;
Chapter One: Contains the General Framework of the study
Chapter Two: Historical Background
Chapter Three: Contains the Specification Model & Literature Reviews
Chapter Four: Empirical Results
Chapter Five: Conclusion & Recommendation
Main results obtained include the following:
1. The empirical test shows that about 88% of the variations in the domestic
price are explained by variation in gross domestic product, broad money
supply, parallel exchange rate and government deficit.
2. According to the results of the estimated inflation model the relative
magnitude of the effect of depreciation of exchange rate on inflation is
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3. higher, and most significant. Decreasing depreciation of exchange rate by
5%, the inflation increasing by 1%, also the magnitude of money supply of
effect on inflation is higher, if the money supply increased by 1.4% then the
inflation increasing by 10%. Also it appear that, for a 6.5% increase in lag
deference inflation rate, increase current inflation by 10%
Last, to reduce the highest inflation rates definitely there must be:
• Reduction of growth rates of money supply through financial and monetary
policies issued by the central bank.
• Controlling government expenditure and limiting financial deficit.
• Preparing monetary and financial polices to guarantee direction of financial
bank polices towards the sectors of priority.
• To put commercial banks under control by central bank.
• Strive to attract savings and current money into the banking system and to
direct it to the production.
Curing of inflation problem can not be done except by the solving the basic
roots of this problem, which represents in drop of production and saving rates,
so it should be endeavor to eliminate obstacles that faced the productive
sectors specially Industrial and Agricultural sectors.
7
‫ﻤﻠﺨﺹ ﺍﻟﺩﺭﺍﺴﺔ‬
‫ﺘﻌﺘﺒﺭ ﻤﺸﻜﻠﺔ ﺍﻟﺘﻀﺨﻡ ﺇﺤﺩﻯ ﺍﻟﻘﻀﺎﻴﺎ ﺍﻻﻗﺘﺼﺎﺩﻴﺔ ﺍﻟﺘﻲ ﻟﻘﻴﺕ ﺍﻫﺘﻤﺎﻤﹰﺎ ﻜﺒﻴﺭﹰﺍ ﻤﻥ ﺠﺎﻨﺏ ﺍﻻﻗﺘﺼﺎﺩﻴﻴﻥ‪ ،‬ﺃﻥ‬
‫ﺍﻟﺘﻀﺨﻡ ﻜﺎﻥ ﻭﻻ ﻴﺯﺍل ﻤﻥ ﺍﻟﻘﻀﺎﻴﺎ ﺍﻻﻗﺘﺼﺎﺩﻴﺔ ﺍﻟﺘﻲ ﺘﻠﻘﻰ ﺍﻫﺘﻤﺎﻤﹰﺎ ﻜﺒﻴﺭﹰﺍ ﻭﻗﺩ ﻅل ﻴﺸﻜل ﺘﺤﺩﻴﹰﺎ ﺤﻘﻴﻘﻴﹰﺎ ﻟﻠﻜﺜﻴﺭ‬
‫ﻤﻥ ﺍﻻﻗﺘﺼﺎﺩﻴﻴﻥ‪ .‬ﺘﻬﺩﻑ ﻫﺫﻩ ﺍﻟﺩﺭﺍﺴﺔ ﺇﻟﻰ ﻤﻌﺭﻓﺔ ﺃﻫﻡ ﺍﻟﻌﻭﺍﻤل ﺍﻟﻤﺴﺒﺒﺔ ﻟﻠﺘﻀﺨﻡ ﺨﻼل ﺍﻟﻔﺘﺭﺓ ‪1970 -‬‬
‫‪.2002‬‬
‫ﺒﺩﺃﺕ ﻤﺸﻜﻠﺔ ﺍﻟﺘﻀﺨﻡ ﻓﻲ ﺍﻟﺴﻭﺩﺍﻥ ﻤﻊ ﺒﺩﺍﻴﺔ ﻋﻘﺩ ﺍﻟﺴﺒﻌﻴﻨﺎﺕ ﻭﻟﻜﻥ ﺘﻔﺎﻗﻤﺕ ﻫﺫﻩ ﺍﻟﻤﺸﻜﻠﺔ ﺘﻔﺎﻗﻤ ﹰﺎ ﻜﺒﻴﺭﺍ ﻓﻲ‬
‫ﺍﻟﻌﻘﻭﺩ ﺍﻷﺨﻴﺭﺓ‪.‬‬
‫ﻭﻤﻨﺫ ﺒﺩﺍﻴﺔ ﺍﻟﻌﺎﻡ ‪ 1978‬ﺍﺘﺠﻬﺕ ﺍﻟﺤﻜﻭﻤﺎﺕ ﺍﻟﻤﺘﻌﺎﻗﺒﺔ ﺇﻟﻰ ﺘﺒﻨﻲ ﺴﻴﺎﺴﺎﺕ ﺍﻟﺘﺤﺭﻴﺭ‬
‫ﺍﻻﻗﺘﺼﺎﺩﻱ ﺍﻟﺘﻲ ﺘﺩﻋﻭ ﺇﻟﻰ ﺘﻘﻠﻴل ﺘﺩﺨل ﺍﻟﺩﻭﻟﺔ ﻓﻲ ﺍﻟﻨﺸﺎﻁ ﺍﻻﻗﺘﺼﺎﺩﻱ ﻭﺠﻌل ﺁﻟﻴﺔ ﺍﻟﺴﻭﻕ ﻫﻲ ﺍﻟﺘﻲ ﺘﺤﻜﻡ‬
‫ﺍﻟﻌﻤل ﺍﻻﻗﺘﺼﺎﺩﻱ‪ .‬ﻭﻟﻜﻥ ﻫﺫﻩ ﺍﻹﺠﺭﺍﺀﺍﺕ ﺍﻟﺘﻲ ﺍﺘﺒﻌﺘﻬﺎ ﺍﻟﺤﻜﻭﻤﺎﺕ ﻗﺩ ﻋﺯﺯﺕ ﻭﻋﻀﺩﺕ ﻤﻥ ﻋﻤﻠﻴﺔ ﺘﺼﺎﻋﺩ‬
‫ﺍﻷﺴﻌﺎﺭ ﻭﻗﺩ ﺃﻭﻀﺤﺕ ﺍﻹﺤﺼﺎﺌﻴﺎﺕ ﺍﻟﺭﺴﻤﻴﺔ ﺃﻥ ﻤﻌﺩل ﺍﻟﺘﻀﺨﻡ ﻤﻘﺎﺴﹰﺎ ﺒﺎﻟﺭﻗﻡ ﺍﻟﻘﻴﺎﺴﻲ ﻻﺴﻌﺎﺭ ﺍﻟﻤﺴﺘﻬﻠﻙ ﻗﺩ‬
‫ﺒﻠﻎ ﺤﻭﺍﻟﻲ ‪ %75‬ﻓﻲ ﺍﻟﻌﺎﻡ ‪ 1989‬ﻓﻲ ﺍﻟﻭﻗﺕ ﺍﻟﺫﻱ ﻟﻡ ﺘﺯﻴﺩ ﻓﻴﻪ ﻫﺫﻩ ﺍﻟﻨﺴﺒﺔ ﻋﻥ ‪ %2.3‬ﻓﻲ ﺍﻟﻌﺎﻡ‪. 1970‬‬
‫ﻓﻲ ﺒﺩﺍﻴﺔ ﺍﻟﺘﺴﻌﻴﻨﺎﺕ ﺯﺍﺩ ﺍﻟﺘﻀﺨﻡ ﺒﻨﺴﺏ ﻤﻁﺭﺩﺓ ﺤﻲ ﻭﺼل ﺍﻟﻰ ﻤﺴﺘﻭﻴﺎﺕ ﻋﺎﻟﻴﺔ‪ .‬ﻭﻟﻜﻥ ﻤﻥ ﺍﻟﻤﻼﺤﻅ ﺍﻨﻪ ﻓﻲ‬
‫ﻨﻬﺎﻴﺔ ﺍﻟﺘﺴﻌﻴﻨﺎﺕ ﺒﺩﺃﺕ ﻤﻌﺩﻻﺕ ﺍﻟﺘﻀﺨﻡ ﻓﻲ ﺍﻟﺘﻨﺎﻗﺹ ﺒﺼﻭﺭﺓ ﻭﺍﻀﺤﺔ ‪ ،‬ﺤﺘﻲ ﻭﺼل ﺍﻟﻰ ‪ %8.33‬ﻓﻲ ﺍﻟﻌﺎﻡ‬
‫‪. 2002‬‬
‫ﺍﺸﺘﻤﻠﺕ ﺍﻟﺩﺭﺍﺴﺔ ﻋﻠﻰ ﺒﻨﺎﺀ ﻨﻤﺎﺯﺝ ﻗﻴﺎﺴﻴﺔ ﻟﻤﻌﺩل ﺍﻟﺘﻀﺨﻡ‪ ،‬ﻭﺘﻤﻴﺯﺕ ﺍﻟﻨﻤﺎﺫﺝ ﺍﻟﻤﺴﺘﺨﺩﻤﺔ ﺒﻁﺒﻴﻌﺔ ﺩﻴﻨﻤﻜﻴﺔ‬
‫ﺤﻴﺙ ﺍﻨﻬﺎ ﺍﺤﺘﻭﺕ ﻋﻠﻰ ﻤﺘﻐﻴﺭﺍﺕ ﺫﺍﺕ ﺇﺒﻁﺎﺀ ﺯﻤﻨﻲ ﻭﻤﺘﻐﻴﺭﺍﺕ ﺍﻷﻭﺴﺎﻁ ﺍﻟﻤﺘﺤﺭﻜﺔ ‪ .‬ﺍﻋﺘﻤﺩﺕ ﺍﻟﺘﻤﺎﺯﺝ ﻋﻠﻰ‬
‫ﺒﻴﺎﻨﺎﺕ ﺴﻼﺴل ﺯﻤﻨﻴﺔ ﻟﻠﻔﺘﺭﺓ ﻤﻥ ‪ . 1970 -2002‬ﻓﻲ ﻫﺫﻩ ﺍﻟﺩﺭﺍﺴﺔ ﺍﺴﺘﺨﺩﻤﻨﺎ ﻁﺭﻕ ﺘﺤﻠﻴل ﻤﺨﺘﻠﻔﺔ ‪ ،‬ﺤﻴﺙ‬
‫ﺍﺴﺘﺨﺩﻤﻨﺎ ﻁﺭﻴﻘﺔ ﺍﻟﻤﺭﺒﻌﺎﺕ ﺍﻟﺼﻐﺭﻯ ﺍﻟﻌﺎﺩﻴﺔ‪ .‬ﺒﺠﺎﻨﺏ ﺍﻨﻨﺎ ﺍﺴﺘﺨﺩﻤﻨﺎ ﻁﺭﻕ ﺤﺩﻴﺜﺔ ﻓﻲ ﺍﻻﻗﺘﺼﺎﺩ ﺍﻟﻘﻴﺎﺴﻲ ﻤﺜل‬
‫ﺠﺫﻭﺭ ﺍﻟﻭﺤﺩﺓ ﻭﺍﻟﺘﻜﺎﻤل ﺍﻟﻤﺸﺘﺭﻙ ﻟﺘﻼﻓﻲ ﺍﻟﻭﻗﻭﻉ ﻓﻲ ﻋﻼﻗﺎﺕ ﺍﻨﺤﺩﺍﺭ ﺯﺍﺌﻔﺔ ‪ .‬ﻭﻗﺩ ﺘﻡ ﺍﻟﺘﺤﻠﻴل ﺒﺎﺴﺘﺨﺩﺍﻡ ﺤﺯﻡ‬
‫ﺇﺤﺼﺎﺌﻴﺔ ﺤﺎﺴﺒﻴﺔ ﻤﺜل‬
‫‪ . E-Views‬ﻭﻗﺩ ﺘﻡ ﺘﻘﺴﻴﻡ ﺍﻟﺩﺭﺍﺴﺔ ﺍﻟﻰ ﺨﻤﺴﺔ ﻓﺼﻭل‪.‬‬
‫ﺍﻟﻔﺼل ﺍﻻﻭل‪ :‬ﺍﻹﻁﺎﺭ ﺍﻟﻌﺎﻡ ﻟﻠﺩﺭﺍﺴﺔ‪:‬‬
‫ﺍﻟﻔﺼل ﺍﻟﺜﺎﻨﻲ‪ :‬ﺨﻠﻔﻴﺔ ﺘﺎﺭﻴﺨﻴﺔ ﻟﻠﺘﻀﺨﻡ ﻓﻲ ﺍﻟﺴﻭﺩﺍﻥ‬
‫ﺍﻟﻔﺼل ﺍﻟﺜﺎﻟﺙ‪ :‬ﺘﺤﺩﻴﺩ ﺍﻟﻨﻤﻭﺫﺝ ﻭﺍﺴﺘﻌﺭﺍﺽ ﺒﻌﺽ ﻤﻥ ﺍﻟﺩﺭﺍﺴﺎﺕ ﺍﻟﺴﺎﺒﻘﺔ ﻓﻲ ﻫﺫﺍ ﺍﻟﺼﺩﺩ‬
‫ﺍﻟﻔﺼل ﺍﻟﺭﺍﺒﻊ‪ :‬ﻨﺘﺎﺌﺞ ﺍﻟﺘﺤﻠﻴل‬
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‫ﺍﻟﻔﺼل ﺍﻟﺨﺎﻤﺱ‪ :‬ﺍﻟﺨﺎﺘﻤﺔ ﻭﺍﻟﺘﻭﺼﻴﺎﺕ‬
‫ﺍﻭﻀﺤﺕ ﺍﻟﺩﺭﺍﺴﺔ ﺍﻹﺤﺼﺎﺌﻴﺔ ﺍﻟﺘﻲ ﻗﻤﻨﺎ ﺒﻬﺎ ﻟﻤﻌﺭﻓﺔ ﺃﺴﺒﺎﺏ ﺍﻟﺘﻀﺨﻡ ﻓﻲ ﺍﻟﺴﻭﺩﺍﻥ ﺃﻥ ﺤﻭﺍﻟﻲ ‪ %88‬ﻤﻥ‬
‫ﺍﻟﺘﻐﻴﺭﺍﺕ ﻓﻲ ﺍﻟﺘﻀﺨﻡ ﺘﺭﺠﻊ ﺇﻟﻰ ﺍﻟﺘﻐﻴﺭﺍﺕ ﻓﻲ ﺍﻟﻨﺎﺘﺞ ﺍﻟﻤﺤﻠﻲ ﺍﻹﺠﻤﺎﻟﻲ ‪ ،‬ﻋﺭﺽ ﺍﻟﻨﻘﻭﺩ ﺒﻤﻌﻨﺎﻩ ﺍﻟﻭﺍﺴﻊ‪،‬‬
‫ﺴﻌﺭ ﺍﻟﺼﺭﻑ ﺍﻟﺤﺭ ﻭﻋﺠﺯ ﻤﻴﺯﺍﻨﻴﺔ ﺍﻟﺩﻭﻟﺔ‪ .‬ﺇﺫ ﺘﻭﻀﺢ ﺍﻟﻨﺘﺎﺌﺞ ﺍﻹﺤﺼﺎﺌﻴﺔ ﺃﻥ ﺍﻨﺨﻔﺎﺽ ﺍﻟﻨﺎﺘﺞ ﺍﻟﻤﺤﻠﻲ‬
‫ﺍﻹﺠﻤﺎﻟﻲ ﻜﺎﻥ ﺍﻟﺴﺒﺏ ﺍﻟﺭﺌﻴﺴﻲ ﻓﻲ ﺍﺭﺘﻔﺎﻉ ﻤﻌﺩﻻﺕ ﺍﻟﺘﻀﺨﻡ ﺨﻼل ﻓﺘﺭﺓ ﺍﻟﺩﺭﺍﺴﺔ ﺤﻴﺙ ﺃﻭﻀﺤﺕ ﺍﻟﻨﺘﺎﺌﺞ ﺍﻥ‬
‫ﺍﺭﺘﻔﺎﻉ ﺴﻌﺭ ﺍﻟﺼﺭﻑ ﺒﻨﺴﺒﺔ ‪ %5‬ﺘﺅﺩﻱ ﺇﻟﻰ ﺍﺭﺘﻔﺎﻉ ﻤﻌﺩل ﺍﻟﺘﻀﺨﻡ ﺒﻨﺴﺒﺔ ‪ .%1‬ﻭﻴﺄﺘﻲ ﺒﻌﺩﻩ ﻋﺭﺽ ﺍﻟﻨﻘﻭﺩ‬
‫ﺒﻤﻌﻨﺎﻩ ﺍﻟﻭﺍﺴﻊ ﺤﻴﺙ ﺃﻭﻀﺤﺕ ﺍﻟﻨﺘﺎﺌﺞ ﺍﻹﺤﺼﺎﺌﻴﺔ ﺃﻥ ﺯﻴﺎﺩﺓ ﻋﺭﺽ ﺍﻟﻨﻘﻭﺩ ﺒﻨﺴﺒﺔ ‪ %1.4‬ﺘﻭﺩﻱ ﺇﻟﻰ ﺍﺭﺘﻔﺎﻉ‬
‫ﻤﻌﺩل ﺍﻟﺘﻀﺨﻡ ﺒﻨﺴﺒﺔ ‪ .%10‬ﻜﺫﻟﻙ ﺘﻭﻀﺤﺕ ﺍﻟﻨﺘﺎﺌﺞ ﺍﻥ ﻤﻌﺩﻻﺕ ﺍﻟﺘﻀﺨﻡ ﻓﻲ ﺍﻻﻋﻭﺍﻡ ﺍﻟﺴﺎﺒﻘﺔ ﻜﺎﻥ ﻟﻬﺎ ﺘﺄﺜﻴﺭ‬
‫ﻭﺍﻀﺢ ﻋﻠﻰ ﻤﻌﺩل ﺍﻟﺘﻀﺨﻡ ﺍﻟﺤﺎﻟﻲ‪ ،‬ﺤﻴﺙ ﺍﻥ ‪ % 6.5‬ﻤﻥ ﺍﻟﺘﻐﻴﺭﺍﺕ ﻓﻲ ﻤﻌﺩﻻﺕ ﺍﻟﺘﻀﺨﻡ ﻓﻲ ﺍﻻﻋﻭﺍﻡ‬
‫ﺍﻟﺴﺎﺒﻘﺔ ﺘﺅﺩﻱ ﺍﻟﻔﻰ ﺘﻐﻴﺭﺍﺕ ﻓﻲ ﻤﻌﺩل ﺍﻟﺘﻀﺨﻡ ﺍﻟﺤﺎﻟﻲ ﺒﻨﺴﺒﺔ ‪% 10‬‬
‫ﺃﺨﻴﺭﺍ‪ ،‬ﻟﺘﻘﻠﻴل ﺤﺩﺓ ﺍﻟﺘﻀﺨﻡ ﻻﺒﺩ ﻤﻥ ﺨﻔﺽ ﻤﻌﺩﻻﺕ ﻨﻤﻭ ﻋﺭﺽ ﺍﻟﻨﻘﻭﺩ ﻤﻥ ﺨﻼل ﺍﻟﺴﻴﺎﺴﺎﺕ ﺍﻟﻨﻘﺩﻴﺔ‬
‫ﻭﺍﻟﺘﻤﻭﻴﻠﻴﺔ ﺍﻟﺘﻲ ﻴﺼﺩﺭﻫﺎ ﺍﻟﺒﻨﻙ ﺍﻟﻤﺭﻜﺯﻱ ﻭﻀﺭﻭﺭﺓ ﺍﻥ ﻴﻜﻭﻥ ﻫﻨﺎﻟﻙ ﻀﺒﻁ ﻋﻠﻰ ﺍﻹﻨﻔﺎﻕ ﺍﻟﺤﻜﻭﻤﻲ ﻭﺍﻟﺤﺩ‬
‫ﻤﻥ ﺴﻴﺎﺴﺎﺕ ﺍﻟﺘﻤﻭﻴل ﺒﺎﻟﻌﺠﺯ‪ ،‬ﻜﺫﻟﻙ ﻤﻥ ﺍﻟﻭﺍﺠﺏ ﺇﻋﺩﺍﺩ ﺍﻟﺴﻴﺎﺴﺔ ﺍﻟﻨﻘﺩﻴﺔ ﻭﺍﻟﺘﻤﻭﻴﻠﻴﺔ ﺒﻁﺭﻴﻘﺔ ﺘﻀﻤﻥ ﺘﻭﺠﻴﻪ‬
‫ﺍﻟﺘﻤﻭﻴل ﺍﻟﻤﺼﺭﻓﻲ ﻟﻠﻘﻁﺎﻋﺎﺕ ﺫﺍﺕ ﺍﻷﻭﻟﻭﻴﺔ ﻭﺍﺤﻜﺎﻡ ﺍﻟﺭﻗﺎﺒﺔ ﻋﻠﻰ ﺍﻟﺒﻨﻭﻙ ﺍﻟﺘﺠﺎﺭﻴﺔ ﻤﻥ ﺠﺎﻨﺏ ﺒﻨﻙ‬
‫ﺍﻟﺴﻭﺩﺍﻥ‪،‬ﺍﻟﻌﻤل ﻋﻠﻰ ﺍﺴﺘﻘﻁﺎﺏ ﺍﻟﻤﺩﺨﺭﺍﺕ ﻭﺍﻟﺴﻴﻭﻟﺔ ﺇﻟﻰ ﺩﺍﺨل ﺍﻟﺠﻬﺎﺯ ﺍﻟﻤﺼﺭﻓﻲ ﻭﺘﻭﺠﻴﻬﻬﺎ ﻟﻺﻨﺘﺎﺝ‪.‬‬
‫ﺍﻥ ﻤﻌﺎﻟﺠﺔ ﻤﺸﻜﻠﺔ ﺍﻟﺘﻀﺨﻡ ﻻﻴﻤﻜﻥ ﺍﻥ ﺘﺘﻡ ﺇﻻ ﺒﻤﻌﺎﻟﺠﺔ ﺍﻟﺠﺫﻭﺭ ﺍﻟﺤﻘﻴﻘﻴﺔ ﻟﻬﺫﻩ ﺍﻟﻤﺸﻜﻠﺔ ﺍﻟﺘﻲ ﺘﺘﻤﺜل ﻓﻲ ﺘﺩﻨﻲ‬
‫ﻤﻌﺩﻻﺕ ﺍﻹﻨﺘﺎﺝ‪ .‬ﻟﺫﻟﻙ ﻴﺠﺏ ﺍﻟﻌﻤل ﻋﻠﻰ ﺇﺯﺍﻟﺔ ﺍﻟﻤﻌﻭﻗﺎﺕ ﺍﻟﺘﻲ ﺘﻭﺍﺠﻪ ﺍﻟﻘﻁﺎﻋﺎﺕ ﺍﻟﻤﻨﺘﺠﺔ ﺨﺎﺼﺔ ﺍﻟﻘﻁﺎﻉ‬
‫ﺍﻟﺯﺭﺍﻋﻲ ﻭﺍﻟﻘﻁﺎﻉ ﺍﻟﺼﻨﺎﻋﻲ‪.‬‬
‫‪9‬‬
Chapter One
General Framework of the Study
1-0
Prelude :-
Inflation has been defined by different economists and still there is no unified
definition that is generally acceptable. However, Inflation is understood by vast
economists as a substantial and a rapid increase in the general price level.
Inflation causes decline in the purchasing pourer of the monetary unit.
Inflation in Sudan has increased steadily and markedly since the turn of the 1990s,
reaching unprecedented rates, and for the first time in the modern history of Sudan
economy inflation hit the three-digit rates. This trend associated with the
particularistic of the 1990s period, which witnessed the application of the
economic Liberalization policies and the complete floating of the Sudanese pound
and the accompanying process of price adjustment. These big economic changes,
the high rates of inflation and the variability of monetary and fiscal policies
resulted in a complicated atmosphere of uncertainly and widespread expectations,
certainly there are costs associated with changing prices, so the producers and
different economic agents will respond to these costs by changing prices. This
process of domestic price adjustment is enhanced by the intention to save the real
value of balances from erosion in the face of high inflation rates.
1.1.
Research Problem:
Sudan economy has been suffering from highest rate of inflation exceeding the
international rates, composed with international inflation rates in the period of the
study (1970-2002). Therefore, we can observe the real problem of inflation in
Sudan, which affects the different sectors of the economy.
1.2.
Objectives of the Study:
The objectives of this study are;
1. Examine the main factors, which generated inflation in Sudan.
2. Determine the relative significance of each factor by suggesting an inflation
model.
10
1.3.
Hypotheses of the Study:
1. There are many factors affected inflation in Sudan such as gross domestic
product (gdp), parallel exchange rate (ex), broad money supply (m2) and
Government Deficit (gd).
2. The monetary and fiscal policies play an important role in increasing or
decreasing the inflation rate.
3. The parallel exchange rate is the main source of inflation in Sudan
1.4.
Methodology:
The methodology is analytical and empirical in nature. All the data of the period
under study are analyzed and empirically tested through the used of econometric
model and this model enables us to determine the inflation magnitude of the effect
of the factors causing inflation, we apply the Least Squires Methods of estimation
apply on time series data covering the period 1970-2002, also we apply the
econometric techniques such as unit root , Correlgram to test the stationarity
series and Causality test to describe the relation between the variables used in the
model.
The method and techniques applied with the help of the Econometric-Views (EViews).
1.5. Data Sources:
The sources and type of data used in this study are secondary data which include;
1. Books
2. Journals
3. Bank of Sudan Annual Reports
4. Ministry of Finance Annual Reports
5. Department of Statistic and Word Bank Tables
1.6.
Organization of the Study:
The rest of this study is organized as follows;
Chapter one is a general framework of study, which presents the preludes,
research problem, the hypotheses, and the objective of the study, the
methodology, and the sources data. Chapter two present a historical background,
which, consists of theory inflation and sources of inflation in Sudan during the
period under study 1970 2002. Chapter three includes the model specification and
literature reviews. Chapter four is the empirical results and recommendations.
11
Chapter Two
Historical Background
This chapter deals with the history of inflation in Sudan during the study period
(1970-2002).
2.1. Theory of Inflation:
2.1.0. Definition:
Different economists have defined inflation and still there is no unified definition
that is generally acceptable. However, inflation is understood by most economists
as a substantial and a rapid increase in the general level of prices. Inflation causes
decline in the purchasing power of the monetary unit. Paish (1962) states that,
“inflation may be defined as a condition in which the national money income is
rising faster than the national real income”. Friedman (1969) argues, “Inflation is
always and everywhere a monetary phenomenon”. Hagger (1977) defined
inflation as “a situation in which there is a persistent upward movement in the
general price level”. And to Reyonalds (1982) “inflation is a rise in the general
money price level of goods. Stated differently, it is a decline in the real value or
the real purchasing power of a sum of money”. Samuelson (1992) states” inflation
denoted a rise in the general level of prices”.
Generally speaking, inflation is defined almost universally as a continuous and
appreciable rise in the general level of prices. Changes in money supply lead to
change in price. More over, changes in aggregate demand lead to changes in price
as well as output. Indeed, because of the inflexibility of wages, prices may be
rising even though the economy still has high unemployment rate and unutilized
capacity. Inflation affects the economy by redistributing income and wealth in
favour of higher- income groups and by changing the level and efficiency of
production.
Inflation comes in different strains. Moderate inflation is characterized by slowly
rising prices or a single-digit annual inflation rate. Inflation in a double-digit
annual rate is labeled as “galloping inflation”. Once galloping inflation becomes
entrenched, serious economic distortion arises. Hyper- inflation takes over when
the printing presses spew out currency and prices start rising continuously.
Historically, hyper- inflation had almost always been associated with wars and
revolutions. Because of its danger, combating inflation is one of the main targets
of macroeconomic policies.
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2.1.2. Measurement of Inflation:
Reference is made to a rise or a fall in the rate of world inflation implying that it
could be measured and has an analytical meaning. The most widely- used
measurement of inflation is the consumer’s price index (CPI). The CPI measures
the cost of consumer’s goods and services. It can be used as an indicator of
inflation in developing countries. The CPI, to a greater extent, reflects the
traditional economy, which is labour-intensive, small-scale and with low
productivity. The GNP deflator is the ratio of nominal GNP to real GNP and thus
could be interpreted as the price of all components of GNP (consumption,
investment, government purchases, and net exports); rather than of a single sector.
The producer index price (PIP) measures the level of prices at the wholesale or
producer’s stage.
2.1.3. Transmission of Inflation:
Inflation may be transmitted to a country through a rise in the prices of
internationally traded goods. Increases in import prices tend to raise the
consumer’s and wholesale price indices of importing country. This tendency is
realized if these increases do not cause offsetting decreases in the prices of other
goods and services. The rise of national price levels and its acceleration has
become generally recognized in recent years to be a world phenomenon.
It has been argued that the average rate of inflation for the world as a whole has
increased by the transmission of inflation pressures among countries. The degree
of openness of economies could affect the level of imported inflation. Many
countries have become subject to such a process in recent years.
The mechanism by which inflation is transmitted among countries assumes that
their national currencies are linked by relatively fixed exchange rates. It is widely
accepted that a country whose domestic monetary and fiscal policies are not
inflationary can avoid importing inflation from foreign exchange value if its
currency is free change. However, international transmission is perhaps the most
difficult subject under consideration, largely because there is no solid guiding
theory about transmission of inflation.
2.1.4. The Long History of Inflation:
Inflation is not a new phenomenon. It is as old as market economies. Inflation was
experienced in ancient times. Prior to the Second World War, inflation occurred
and immediately after the war when government financed the war by resorting to
issuing money. Also, it occurred during period when significant gold discoveries
were made. First World War brought up inflation in many countries. Its worst
13
impact came in Central and Eastern Europe where economic and political
disruption was more several. At those times inflation mainly resulted from the
strain of warfare and its disruption of production. “In the 1920’s, stable price
levels had been resorted almost everywhere. In 1930’s,the great depression spread
over to many countries. Most of the industrial countries experienced declining
prices and the cost of living decreased substantially. With World war II, inflation
reappeared and spread quickly throughout trading nations. By the end of World
War II, most of Europe suffered relatively higher rates of inflation. During 1950’s
and 1960’s the widespread type of a moderate inflation was called creeping
inflation. In the early 1970’s, the rise in oil prices was mainly responsible for the
acceleration of inflation throughout the world.” Schultz 1969
2.1.5. Theories of Inflation:
The debate on the causes of inflation has assumed special significance since
policy makers should have to face the severe impact of accelerating inflation. To
reduce the rate of inflation is rapidly becoming one of the main objectives of
economic policies. Yet, government’s policies to control inflation have not been
fully successful. The partial failure may be attributed to the nature of diagnoses of
the causes of inflation, leading to application of inappropriate measures. Thus,
economists have advanced a variety of diagnoses of the causes of inflation, which
have provided the base for policy alternatives.
Inflation has been examined by a number of theories and models purporting to
explain and analyses world- wide price increases. Despite the efforts to
understand inflation, it is apparent that economists would not claim to have a
satisfactory universal theory of inflation that accurately and fully serves the needs
of policy makers. The rest of this chapter is intended to examine the main theories
of inflation.
2.1.6. The Quantity Theory of Money (transaction version):
The quantity theory of money, which was developed in the writings of David
Hume and David Ricardo in the 19th century, interprets the theory of money as
only a theory of the value of money. The classical economists believe that money
has no effect on the real output and employment. They always emphasized the
interdependence that exists between money market and commodity market. To
them, real output and employment are determined by land, productivity of labour,
and capital, non-of, which are affected by the money supply.
Irving Fisher argued that:
“Except during transition period, the volume of trade like the velocity of
circulation of money is independent of the quantity of money. An inflation of
14
currency can’t increase the product of the farms nor the speed of trains or ships…
the whole machinery of production and sale is a matter of physical capacities and
techniques, non of which depend on the quantity of money” Samuelson 1989
The classical economists assert that full employment prevails all the time. Thus,
to them the situation of unemployed resources could only exist during transitional
periods. They also think that actual output is normally equal to potential level.
The classical quantity theory is best illustrated by Irving Fisher’s equation of
exchange. This equation states that:
MV = PT
(2.1)
Where,
M = the quantity of money
V = the velocity of circulation of money “or the number of times money
Changes hand”
P = general price level
T = Total Volume of transaction
The above equation states that, in any period, the value of sales and purchases are
equal- since they are alternative description of the same transactions.
The classical economists put the following assumption to derive the quantity
theory:
1. Money (M) is used to facilitate the transaction and it’s a general
accepted medium of exchange;
2. Velocity of circulation of money (V) is relatively fixed because
payments patterns and habits are constant;
3. The volume of transaction (T) or the real national output is fixed,
this was based on the assumption of full employment;
4. Prices and wages are flexible;
Now we turn to see how the price level is determined in the classical economy. If
velocity (v) is constant, and output was determined, by using the equation of
exchange the price level can be determined according to the following equation:
P= MV/T
(2.2)
In this analysis price level depends directly and proportionately on the quantity of
money. Fisher States that:
“ The quantity theory asserts that; provided the velocity of circulation and the
volume of trade are unchanged, if we increase the number of dollars whether by
15
renaming coins or by increasing coinage, prices will be increased in the same
proportion “ J.L.Hason 1978.
So the general price level according to the quantity theory of money is determined
by money supply. If money supply increases, the price level must directly
increase. Inflation occurs when the quantity of money is stabilized. Thus inflation
is a monetary phenomenon in the classical model.
The policy implications of the basic quantity theory are:
1. Increases in money supply will raise the price level in the short run, but it
does not affect the real variables in the long run;
2. As long as the government does not intervene in the economy, market
mechanism will enable the economy to adjust itself in case of any
disequilibrium.
2.1.7. Cambridge Equation (Cash-Balance Version):
The Cambridge school introduced the quantity theory in a new way, but it used
the same assumptions. "The difference between the quantity theory equation of
exchange and the Cambridge equation or the cash – balance approach is that; the
latter theory concentrates on the effect of the demand for money on the economy"
S.Ghatak1981.
According to the Cambridge version, there is a certain proportion or constant
fraction of income (K), which is held in the form of currency or real money
balances.
The Cambridge equation:
M = k PY or P = M / k Y
Where:
k = is the fraction of income that is held in cash and it is equal to the
inverse of the velocity of circulation.
M = Money Supply
P = The general Price level
Y = Total Volume of transactions
In the Cambridge version, the price level is determined by the equilibrium
between the demand for and the supply of money. Any increase in M, will affect
the cash balance of the public. Since output cannot rise beyond the full
16
employment level, and also since the fraction held as cash is constant, prices will
increase in an equiproportional rate as the increase in the money supply. Anew
equilibrium is maintained at a new price level where the demand for and the
supply of money are equal. So inflation in the Cambridge theory is considered as
a function of excess demand. When the supply of money increase there will be
excess cash balances, this excess of cash will create excess demand for goods
and services. And since output cannot rise beyond the full employment level the
result is likely to be a biding up of the price level or inflation.
Thus, the effect of changes in money supply on the price level in Fisher’s
equation is the same as that of Cambridge equation.
2.1.8. Keynesian School Views on Inflation:
In the General Theory, Employment, Interest and Money, Keynes traced the
problem of massive and prolonged unemployment to deficiencies in effective
demand. His theory amounted to the proposition that economic agents were not
employing fully the available labor force.
If only economic agent could be induced to spend more, output would rise leading
to a rise in employment. The remedy advocated by Keynes had the single
objective of stimulating aggregate expenditures so as to achieve full-employment
without inflation, or by reducing the general level of taxation in order to stimulate
consumer’s expenditures.
“Keynes started with the need to concentrate on the behavior of output and
employment rather than of the general price level. He stated that under conditions
of continuous full-employment, the price level would sooner or later reflect
changes in the quantity of money. But in a situation of under employment the
quantity theory of money would be misleading since it did not allow for the effect
of increased spending on the level of output” Zis,G 1967. An increase in the level
of expenditure might or might not require an increase in money supply; but even
if it did, the response in additional output might not involve a rise in price,
depending on the shape of aggregate supply curve. Figure (2.1) shows the
Keynesian’s view in terms of the behavior of aggregate supply and demand.
Keynesian economists stress that the aggregate supply curve is relatively
horizontal in the short run. While Keynesian theories hold.
That many forces affect aggregate demand (fiscal policy, net exports), monetarists
argue the changes in the money supply are the primary factor determining output
are price movements. Because they hold different views about the slope of the
aggregate supply curve, Keynesian economists and monetarists disagree on the
short run impact of changes in aggregate demand. Keynesian economists believe
17
that a change in demand will significantly change output with little effect on price
in the short run. Monetarists hold that a shift in demand will primarily end up
with changing prices rather than quantities.
2.1.9. Monetarists School Theory of Inflation:
From the point of view of the monetarists, the primary cause of inflation is a
abrupt change in the growth rate of money stock. Friedman (1969), one of the
leaders of the monetarist’s school, maintains that inflation is always and
everywhere a monetary phenomenon and can be brought up only by more rapid
increase in money supply beyond the natural rate of growth of output. This means
too much money chasing too few goods. Monetarists argue that inflation in many
developing countries originates and is maintained by expansionist monetary and
fiscal policies. They believe that monetary and fiscal policies are appropriate
remedies to curb the excess demand and consequently reduce the rate of inflation.
The traditional explanation of inflation was the quantity theory of money, which
goes back as far as Dived Hume. The quantity theory of money was based on the
simple fact that the value of money depends upon the amount of money in
circulation. In terms of equation (2.1) .
It is clear that an increase in money supply, on the left side of equation (2), must
lead to proportional increase in the general price level on the right side of the
equation (where V and T are assumed to remain constant). If people have more
money and continue to spend at a high rate, there will be much money chasing a
limited amount of goods and services. The price of these goods and services will
be pushed up by competition. In other words, if the purchasing power in the
economy is high, this leads to higher prices taking into consideration inelastic
supply conditions” J.K. Hason 1978.
Monetarists who looked at inflation as a purely monetary phenomenon, firmly
believed in the quantity theory of money. They regarded fluctuations in money
incomes and expenditures as a result of fluctuations in money supply. Since the
beginning of 1980’s the principal objective of monetary policy in major industrial
countries has been to reduce inflation and inflationary expectations. During
1980’s and early 1990’s monetary policy makes adopted an electricity philosophy
tightening or easing money depending upon trends in inflation, unemployment
and the exchange rate aggregates.
2.1.10. Cost- Push Theory of Inflation:
According to the Cost-Push Theory, the basic explanation of inflation is the
increase in the cost of producing goods and services due to increase in wages and
the cost of production. Production cost will increase when groups of workers and
18
some of producers, or both, succeed in raising the prices for their products and
services. So the inflationary pressures, in this context, originates with the supply
rather than demand and spread through the economy. The increase in wages will
increase the proportion of total cost of producing goods and services. To maintain
their pervious level of profit, the producers will pass on any rise in the cost of
production to the consumers in forms of higher prices of goods and services and
thereby, the general price level will rise.
The Cost-Push type of Inflation raises a serious and difficult policy problem. An
Inflation caused by Cost-Push factors cannot be controlled by the traditional
monetary and fiscal policy directed to affect the aggregate demand, because
wages and administered prices by their nature are insensitive to changers in
demand. Thus, policies directed to affect overall demand may not affect prices;
instead it might affect the production level and employment. On the other hand
policies that involve direct control over wages would be strongly resisted by
workers through their trade unions. To cure such type of Inflation, the government
must exercise controls over wages, prices, and profits in the economy. In such
type of inflation only incomes policy may be used to lower Inflation rates.
2.1.11. Demand- Pull Theory Of Inflation:
One of the major shocks to inflation is a change in aggregate demand. Demandpull inflation occurs when aggregate demand rises more rapidly than the country’s
productive potential, pulling prices up to equilibrate aggregate demand and
supply. Prices, however, are not assumed to rise if resources are not fully utilized.
If resources are fully utilized, any shift in demand curve to right will pull the price
levels upwards. Figure (2.2) shows the process of demand-pull inflation in terms
of aggregate supply and demand. Starting from an equilibrium point at e1 suppose
there is an expansion of spending that pushes the AD curve up and to the right.
With steep, AS curve, much of higher aggregate spending pulls up the prices.
Prices will rise from P1 to P2.
Therefore, demand-pull inflation can be initiated by an increase in government
spending where borrowing from the banking system finances the deficit.
Additional expenditures bring additional activities and cause businessmen to buy
more materials and components, employ more labour, increase works hours and
eventually expand plants. The Multiplier would take place. Samuelson and
Nordhaus (1992) argue that “demand pull inflation can arise from other sources as
well; for example during the Vietnam War, excessive fiscal deficits raised the
demand for output well above its potential and ignited rapid inflation” .
During 1950’s and 1960’s the distinction between cost-push and demand-pull
inflation dominated the debate on causes of inflation. Thus, Schultz (1969)
19
presented "a theory on inflation which attempts to combine elements from both
demand-pull and cost-push explanations of inflation “Samuelson, P.A. (1992).Raising
prices are the outcome of the combination of both theories. That is neither
monopoly power nor excess demand is the prime cause of inflation. Galbraith
(1967) presented a theory of inflation similar to that of Schultz. He rejected the
distinction between cost-push and demand-pull inflation and treated inflation as a
outcome of wages and prices pressing each other up in a continuing spiral, when
aggregate demand is maintained at higher levels.
2.5.6. Phillips Curve:
While the debate between cost- push and demand- pull was taking place, Phillips
(1958), "presented statistical evidence to support the existence of the inverse
relationship between unemployment and the change in money wages" 1. He found
that wages tended to rise when unemployment was low and vice versa. Workers
would press less for wage increases when fewer alternative jobs were available. In
addition, firms would resist wage demands more firmly when profits were low.
Thus, Phillips curve becomes rapidly accepted as an approach to the problem of
inflation and provided the basis of highlighting the conflict in the policy
objectives of full- employment and price stability.
Figure (2.2) depicts the trade-off between inflation and unemployment. The
Phillips Curve illustrates the trade-off theory of inflation. It has been described as
a menu for choice between inflation and unemployment. According to the Phillips
Curve shown in the figure, inflation will be 2% per year if the unemployment rate
is 10%.
The Phillips Curve has under gone a fundamental shift since 1970’ reflecting the
increased importance of inflation expectations and leaving the economy with both
high unemployment and chronic inflation. The traditional trade-off between
inflation and unemployment broke down when accelerating rate of inflation
coincided with higher levels of unemployment. Zis (1970) argues that
“accelerating inflation coupled with higher unemployment and increased
industrial unrest provided the basis for argument that recent inflation is not an
economic problem but rather a sociological phenomenon”.
2.1.12. Summary:
Inflation occurs when the general level of prices rises. Inflation is calculated by
using price indices. The consumer’s price index (CPI) measures the cost of
market basket of consumer’s goods and services relative to the cost of that
bundle during a particular year. Until Second World War, inflation rose during
wartime and fell after that.
20
Inflation has been examined by a number of theories and models purporting to
explain and analyze World-Wide price increases.
Modern monetary school was developed after Second World War by Chicago’s
School. Under Friedman leadership, monetarists challenged the Keynesian
approach to macroeconomic and emphasized the role of money in the
inflationary process.
2.2. Sources of Inflation in Sudan (1970-2002):
This part focuses on the main sources or the main factors that are responsible for
inflation phenomenon. In the first part of this chapter we explore the sources of
inflation in Sudan and in the second part of this chapter we present an empirical
investigation pertaining to Literature Review that discusses the main factors that
caused and accelerated inflation.
2.2.0. Introduction:
Concerning the sources of inflation there are many factors, which might generate
inflation. Economists generally attribute inflation either to excess demand for
goods and services or to shortages of goods and services. They broadly agree
upon three types of inflation, the first one is the demand-pull inflation, which exist
due to excessive aggregate demand. This type of inflation can be caused by real
factors, such as the increase in any of the components of the aggregate demand, or
by monetary factors, such as increase in money supply. The second type of
inflation is the cost -push inflation, which is caused by a rise in the cost of
production, like wages and salaries and input prices. Namely pressures exerted by
trade unions to increase wages and increases in input prices will both increase
production cost and, thereby, increasing the general price level. The third type of
inflation is that which is related to the structure of the economy.
Previous studies on inflation in Sudan broadly agree on the key factors
influencing the rate of inflation. These factors include: the growth of money
supply, income growth, the structure of the economy, wage growth and imported
inflation, government fiscal and monetary polices, and exchange rate movements.
2.2.1. Money Supply:
The study of the relation or the connection between price movement and the
changes in the money supply requires and necessitates a brief review of the
development in the money supply during the period under study. It is of great
importance to trace the changes in the money supply before analyzing and
21
investigating the dynamic process by which money expansion has an effect upon
the general price level.
In the literature concerning money supply there are several measures and
definitions of the money supply or money stock. The major definition of money is
the narrow definition of the money supply (M1) and the broad definition of the
money supply (M2).
Such definition and classification of money supply or “monetary aggregate” “is
important for its usefulness for purposes of economic policy, especially when
seeking to control the growth of the money supply” J.L.Hason, 1978.
The relationship between the inflation rate and money supply depends largely on
which indicator used as a representative of the money supply. Since transaction
money (M1) is spent mainly for purchase of goods any increase in money supply,
not associate with a proportion increase in the consumer goods supply, a supplydemand gap will result and create inflationary pressure. However, in case of the
M2, sharp changes in money supply and credit growth might have a similar effect
in GDP. “Increase in money supply and credit always associated with increase in
production or booms, and the contraction in money supply and credit are followed
by recessions” Paul A. Samuelson & Willim 1989 .
The narrow definition of money M1 (transaction money) defines money as
currency with the public plus demand deposits or checking accounts.
The board definition M2 (near money) defines money as currency with the public
plus demand deposits plus quasi-money. In this study we concentrate on the board
definition of money supply (M2). The board definition of money is a precise and
accurate indicator of the trends of money supply growth and economic activity.
As shown in table (2-1) Broad Money (M2), increase by 24.6% in 1999. However,
the percentage increase is lesser than that of 1998 because:1. Currency with the public increased in 1999 by 32% compared to 40%
in 1998.
2. Demand deposit also increased from 1998 to 1999 by 26%.
3. Quasi Money increased from 1998 to 1999 by 16%.
The broad money (M2), which consists of currency with the public and the
demand deposit, achieved the margins of document credit in addition to the saving
deposit for late. Achieved exposed growth for the year 2001, which is 47.7% and
this performance considered better compared with the previous year. In this year
the money supply expand with the rate of 42.4% compared with the target rate
estimated 19.4%. For the year 2001 M2 increasing by 42.7%, this attributed to the
22
a rise in quasi money by the rate of 43%. In addition to current payment by the
rate of 16%, which include the increasing in demand deposit by the rate of 27%
and currency with the public by the rate of 8%.
2.2.2. Cross domestic product GDP:
Table (2-2) shows that the average growth rate of real gross domestic
product (GDP) for the period (1970-1980) was 13.2% compare with 6.3%
for the period (1981-1997) its clear there is decline in the growth rate of
GDP this can be referred to that; The GDP for the year 1984 had reflected a
negative growth rate of 11.5% but it had risen to positive 10.2% for the year
1985 while it’s come again to record a declining for the year 1986 to 4.9.
That referred to changes in relative share of the agricultural sector in the
GDP. Which recorded 35% for the year 1985 and 38% for the year 1986 so
we can observed that the agricultural sector recorded a negative growth rate
for the year 1984 which is 23.4% and a positive for the year 1985 which is
26%, but it slowed down in the year 1986 to 2.6%. So we can attribute the
changes of the GDP for the period (1970-1980) compared with the period
(1981-1997) to the changes in the agricultural sector.
In pursuance of the objectives stated out in the national comprehensive
strategy efforts during 1999 centered on implementing the objectives of four
year programme1999-2002 which focused on liberalization of the economy,
reduction of the rate of inflation and raising the national income through a
higher growth rate of the GDP. During this period the rate of growth of the
agricultural sector (by its two components a agrarian and livestock
registered slight increase from 8.3% in 1998 to 8.5%in 1999 and it decreased
from %4.7 in 2000 to %3.8 to 2001.
Regarding the industry manufacturing and mining sector the real growth rate
recorded noticeable increase from 3.6%in 1998 to 19.7% in 1999 this is due
to entry of crude petroleum as a new product in the mining sub-sector but it
highly decrease from 77. 4% in 2000, to 17.3% in 2001, this is attributed to
decline in the growth rate of mining sub-sector.
In 2002 the growth rate of GDP decreased from 6.4% in 2001 to 6% in 2002
this attributed to the decline in the growth rate of industry sector from 17.3
% in 2001 to 6.3% in 2002, that is due to the decreasing growth rate of
mining sector.
23
2.2.3. Depreciation of Exchange Rate:
Most of the studies in inflation in LDCs.showed the significant relationship
between currency depreciation and domestic inflation. This reflects the fact
that domestic prices had substantially adjusted to the free market exchange
rate, or what is called the Dolarization process.
When exchange rate is floating, the immediate consequence of a relatively
high inflation rate is depreciation of the currency concerned and, in turn, a
higher price level in the high-inflation country.
“The rate of exchange rate in Sudan showed a declining trend as from 1980
through 1997,as from 1998 through 2002 it was relatively stable this was due
to effectively unified exchange rate since 1998, see table (2-3). And the
exchange rate was pegged to US dollar as an anchor for the price level. Price
control played a part in stabilization strategy” Annual Report 1999, 2001
24
Table (2-1)
Growth Rate of Broad Money
year
M2
RM2%
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
123.21
156.97
216.10
277.45
326.15
601.81
775.61
1,040.74
1,420.85
2,270.87
3,164.46
5,269.55
14,159.45
26,858.34
40,535.29
70,586.60
116,598.60
159,713.70
206,951.30
257,918.00
346,671.00
432,213.00
563,266.00
27.40
37.67
28.39
17.55
84.52
28.88
34.18
36.52
59.82
39.35
66.52
168.70
89.68
50.92
74.14
65.19
36.98
29.58
24.63
34.41
24.68
30.32
Annual Report for the year 1999, 2002 Bank of Sudan
25
(Table 2-2)
Sectors Share in the GDP for Selected Years Over 1970 2001
Years
Sectors
1970-1980
GR Shar
e
1981-1997
G Shar
R
e
1998
G Sha
R
re
9.
57
7.
74
8.
3
3.
6
2001
GR Sh
ar
e
48.7 8. 49.8 4. 46.4 3.8 45.
5
7
6
8.1 19 9.1 77 15 17.3 16.
.1
.4
6
Agriculture 22.1
32.2
41.7
Industry,
Manufactu
ring and
Mining
Constructio
n
Governmen
t Services
Electricity
and Water
Growth
Rate of
GDP
20.9
7.5
80.5
5.11
20
18.4
10
5.1
17.3
8.5
14
20.1
6.5
11.9
1.34
2.25
13.2
-
9.
4
6.
38
16
.5
3.
9
6.
2
7.68
-
1999
G Sha
R
re
2.
4
0.
0
2.
0
6
1.8
-
Source: Compiled by the author (see appendix 2)
26
4.9
6.2
1.8
-
2000
G Sha
R
re
3.
3
1.
6
5.
9
8.
3
GR
2002
Share
7.6
46.6
6.3
16.3
4.7
3.5
4.5
4
5.5
5.8
4.5
6
2
5.8
1.7
5.2
1.7
5
1.7
-
6.4
-
6
-
Table (2-3)
Growth Rate of Parallel Exchange Rate
year
E
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
R E%
0.50
0.90
1.30
1.30
2.50
2.50
2.50
4.50
4.50
4.50
4.50
15.00
132.80
216.00
400.00
838.00
1,460.00
1,712.00
2,370.00
2,580.00
2,573.00
2,614.00
2,624.00
80.00
44.44
92.31
80.00
233.33
785.33
62.65
85.19
109.50
74.22
17.26
38.43
8.86
0.27
1.59
0.38
Annual Report for the year 1999, 2001 Bank of Sudan
27
28
29
Chapter Three
The Empirical Model
3.1. Introduction:
In general the domestic price level (p), in an economy, is assumed as a linear
combination of the price level for tradable goods (pt). non-tradable goods
(pnt), which could be expressed as;
p = α p t + (1 − α ) p nt
(1)
where
0<α<1
pt is the price level for tradable goods
pnt is the price level for non-tradable goods
The price of tradable goods (pt), could be obtained from the foreign
market equilibrium condition; which is usually expressed in the P.P.P. As;
pt = w/ e
Where
w = foreign prices
e = the exchange rate
The price of non-tradable goods (pnt), is usually assumed to be determinates
by the domestic money market demand, which could be obtained from as
follows;
∗
m / p = f ( y , π , ex )
(2)
Where
m = Nominal Money Supply
p = General Price Level
m/p = Real Money Supply
y = Real Gross Domestic Product
π = Rate of Inflation
ex = Exchange Rate
30
By combining equation (1) and (2) we can solve for the general price level.
According we can write the aggregate price level as follows;
p = ( m , y , π , ex , gd )
(3)
All variables are defined as before, where gd is government deficit.
*y
= α ( m − p ), c = c ( y ), m / p = l ( y , i ), i = l ( y , r ) r = i − π
3.2. Literature Review:
Before presenting the empirical results pertaining to the main factors that
caused inflation in Sudan during the period 1970-2002 it is of great
importance to review previous empirical studies on the sources of inflation
on Sudan.
These studies include Safi Eldin (1979), Hussain (1986), Safi Eldin (1993),
Zakaria (1994), and Faiza (1999).
3.2.1. Safi Eldin(60-79):
Safi Eldin 1979 adopted a stepwise regression model for the period 1960-79,
the results obtained are shown bellow : the figures between brackets are the
standard errors of estimates.
pt = 5.9 + 0.31mt + 0.75mt-1 – 0.83 yt + 0.27pt-1
(2.15)
(4.45)
(5.31)
(1.9)
R² = 0.84
Where:Pt = Annual Rate of Inflation
mt = Growth Rate of Money Supply
mt-1 = Growth Rate of Money Supply (lagged one year)
yt = Growth Rate of Real GDP
pt-1 = Annual Rate of Inflation (lagged one year).
Safi Eldin argued that the “statistical analysis of inflation in Sudan over the
sample period (1960-79) has shown that the observed variation in the rare
of inflation (pt) is explained very satisfactorily by the four basic explanatory
variables of the monetarist model”². He concluded, “There is enough
statistical evidence to convince us that our current inflation is Demand
Pull”2.
31
Despite the great effort done in this study, the weakness of this study is that
it considered money supply as a sole factor causing inflation while ignoring
other factors which might cause inflation.
3.2.2. Hussain (1986):
Hussain used Cost-Push Domestic Inflation using data during 1967-77.
He obtained the following estimated equation: pd = -0.37 + 0.56 wd + 0.29 qd – 0.48pw
(-1.7) (1.64) (3.11) (3.63)
R² =59
Where,
pd = Rate of Inflation ,
wd = Growth Rate of Domestic Wages
qd = Growth Rate of Productivity
pw = Growth Rate in the Cost of Imported Production Inputs.
As revealed by the adjusted R² about 59% of the variation in domestic
inflation is caused or explained by the variations in wages, imported
inflation, and productivity. Hussain argued that” according to the result of
the above equation relative magnitude of the effect of wages on inflation is
higher than the effect of imported inflation, while the sign of the estimated
coefficient of the productivity variable(Q) does not confirm the expected
theoretical sign”¹. Moreover, results obtained from Hussain’s model show
that for a 10% increase in the world inflation, ceteris paribus, domestic
inflation would increase by 4.8% in the short run.
3.2.3. Safi Eldin (1993):
Reexamined the factors affecting inflation using the monetary model of
1979 with new data for the period 1980-1989, he obtained the following
results:
pt = 1.77 + 0.25mt + 0.45pt-1 + 0.84yt
(1.87)
R² = 0.51
F-Ratio = 3.44
(2.29)
(1.55)
D.W. = 1.5 d.f = 4
32
Based on the results of the above equation Safi Eldin argued that “this time,
the coefficient of yt is positive, i.e. not in conformity with theoretical
expectation as it was in 1979”1. Another defect in the new model is that the
explanatory power of the three main variables is (51%) which is must less
than had been in 1979.
Also Safi Eldin found that when lagged inflation is added to the equation as
an additional explanatory variable, R² fall to 36% in the 1993 model, while
its entry in 1979 raised R² to 0.84.Accordingly, Safi Eldin concluded that,
present data are inferior in quality, and that the rate of inflation is not easy
to be predicted or control.
3.3. Data Methodology and Specification Model:
This part deals with sample size selected and the major variables, which are
used. It deals with data sources, and data transformation (natural logarithmic
and deference or annual change), data analysis (causality and stationary
tests), and model, which can be used (Least Squire and Error Correction
Model),
3.3.1. Sample Size:
In the sample we used annually data, from 1970-2002, that is about 33
observations were used. During this period there are big changes in the
characteristic of Sudan economy (privatization, federalism, devaluation of
currency, etc.),
3.3.2. Stationary Test:
Before calculating sample estimates of the coefficients of any series, one
must check whether the series appears to be stationary or not. If a time series
is not stationary, is necessary to look for possible transformations, that might
induce stationary.
33
“There are two principal methods of detecting non-stationarity:
1. Subjective judgment applied to the time series graph of the series and
its correlogram.
2. Formal statistical tests for unit root”¹
3.3.3. Causality Test:
Granger suggests that an operational definition should treat causality as a
matter of the ordering of events in natural time. “The future can not cause
the past”. Granger’s original statistical criterion is the error variance. A
variable Y causes a variable X by Granger Causality, if the error variance of
X conditional on all past values of all variables is less that the error variance
of X conditional on all past variables except Y. If X cause Y and Y cause,
then there is Feed Back between X and Y.
Granger’s definition immediately suggests a simple test of causality. An
investigator would run a regression of X on a number of lags of itself and on
a number of lags of Y. If a standard test showed that the lagged value of Y
were not statistically significant in explaining X, then the null hypothesis
that Y does not cause X could not be rejected.
3.3.4. Specification of the Model:
As we have mentioned in the beginning of this study that inflation in Sudan
may be determined by the gdp, m2, ex, and government fiscal deficit. The
long-run relationship between money and prices has been confirmed by an
impressive number of empirical studies both across countries and across
time. Generally the relation between inflation rate, monetary and
macroeconomic indicators can be expressed as follows:
inf t = α 1 + α 2 m 2 t ± α 3 yt + α 4 ext + α 5 gd t + ut
(3.1)
Where,
inf t = Rate of Inflation
m2 t = Real Broad Money Supply
y t = Real Gross Domestic Product
ex t = Exchange Rate
gd t = Government Deficit
34
After specifying the functional form of the model, now we are going to
represent the model in its mathematical form, and we suggest different form
to be tested to see which one is more suitable for Sudan.
3.3.4.1. Data Transformation:
Data transformations include logarithmic rate of change, growth rate these
are expected to play an important role in econometrics. Generally we are
going to consider briefly their impact on the data.
The data will be transformed to achieve the stationary state in case the unit
root reveals that it contains unit root in level of variables.
In that case two formulas will be used to transform the data, which are:1. Formula one transforms data to natural logarithms, as follows;
l inf
t
= b 0 + b 1lm t − b 2 ly t + b 3 lex t + b 4 lg d t + e t
(3.2)
Where, l inf, tlmt , lyt , lext , lg dt are logarithm of inf, m2, y, ex and gd
respectively, e is the error term and bs. is coefficients of the
variables .
2. Formula two transforms data to difference between the sequential
data “growth rate”, which can be written as;
∆inft = b0 +b1∆mt −b2∆yt +b3∆ext +b4∆gdt + et
(3.3)
Where, ∆ inf,1∆m, ∆y, ∆ex, ∆gd , are rate of growths of inf, m2, y, ex
and gd respectively, e is the error term, and bs. are coefficients of the
variables.
35
Chapter Four
Empirical Analysis
4.0. Preface:
Our basic model of the logarithms of the variables levels, which is reproduce
as;
l inf
t
= b 0 + b 1 lm t − b 2 ly t + b 3 lex t + b 4 lg d t + e t
(4.1)
The relation between inflation rate (linft) and real broad money (lmt) is
expect to be direct relationship; hence its sign should be positive, also we
expected the relationship between inflation rate and exchange rate (lext)where an increase is a deprecation, government deficit (lgdt) to be positive.
The relation between inflation rate and gross domestic product (lyt), is
expect to be indirect relationship, hence the sign should be negative. In
terms of the coefficients of the model we expect that;
b1 b3 b4 > 0 > b2
4.1. Result of the Analysis:
As we mentioned at the end of the previous chapter, Empirical model
depends on the statistical analysis results.
So our study will start with the following form the above model;
inf t = b 0 + b 1 m t + b 2 y t + b 3 ex t + b 4 gd t + b 5 inf
t −1
+ et
(4.2)
Where,
inft = Inflation Rate at time t
yt = the real Gross Domestic Product at time t
m2t = Real Broad Money Supply at time t
ext = Exchange Rate at time t
36
gdt = Government Deficit at time t
inft-1 = Inflation Rate of lag one year
Table No. (4-1) below present the results of the above estimate of the
regression model.
Table (4-1)
Result of the First Run of the Model
Variable
Coefficient
T- Statistic
T- Significant
19.4
Standard
Error
8.3
C
2.32
0.02
yt
-8.5
4.8
-1.75
0.09
mt
2.2
3.1
0.68
0.49
0.06
0.04
1.35
0.18
gdt
2.7
0.00
0.16
0.86
inft-1
0.5
0.2
2.55
0.01
ext
R2 = 0.63
R-2 = 0.55
F Statistic = 8.23
F significant = 0.00000
St. E. of Regression = 25.36
Akiake Information Criterion
Schwarz Criterion
Dh= 2.4
9.49
9.76
White Heteroskedasticity Test:
F-Statistic 3.57
Probability 0.00
Obs x R-2
19.58
Probability 0.03
Serial Correlation Test (Breusch - Godfrey):
F-Statistic 3.28
Probability 0.05
Obs x R-2
6.89
Probability 0.03
Normality Test:
Jarque-Bera Statistic 7.50
Probability 0.02
Source: Compiled by the author (see appendix 1)
The above table shows that the theoretical signs of coefficients of the
explanatory variables (y, m, ex, gd, inft-1) are confirmed empirically. The
37
results also show that about 63% of the variations of inflation are explained
by the explanatory variables.
The D.h. statistic value (2.4) indicates that there is no serial correlation
between the error terms, and the over-all test (F-statistic) of the model
indicates high significant.
Where as the individual (T-Statistic test) for the independent variables
shows that the parameters estimated for (m, ex, gd) are not different from
zero. However, the other variables are not significant, indicating possible
problems. Therefore we proceed by determining the unit root properties of
the data. There are two principals’ methods of detecting stationary:
1. Subjective judgment applied to the time series graph of the series and
to its correlogram.
2. Formal statistical test for unit roots.
Figure (4-1) shows that the plots of the study variables and intervals. It is
clear from these graphs that all series are not stationary. A more powerful
discriminator is the correlogram these series is also shown in correlogram
figure (4-2) it is shown that; when we plotting the auto-correlation
coefficients against the length, gives the correlogram of the series. The autocorrelation decline exponentially from one toward zero (1 ~ 0), when the
series is stationary. As seen from the plots of the correlogram these series
contains unit roots.
Furthermore the unit-root test is performed for the individual series; using
Augmented Dickey-Fuller (ADF) the results reported in table (4-2).
All variables contain unit-roots in the level and their first logarithmic
transformation is stationary. These testing results imply that the modeling
process can proceed by using rates of growth of the level variables or their
first difference. It is known that the latter procedures solve the problem of
spurious regression but loss the information’s contained in the level of
variables. Before estimating the model,
.
38
Table (4-2)
Augmented Dickey-Fuller Unit Root Test
Variable
LP (-2)
LGDP(-2)
LM2 (-2)
LEX (-2)
LG (-2)
ADF
Statistic
Level of
Variables
ADF
Statistic
First
difference
Of variables
Critical Value
1%
-3.69
-3.69
-3.69
-3.69
-3.69
-4.43
-4.07
-3.82
-6.24
-8.56
5%
-2.97
-2.97
-2.97
-2.97
-2.97
10%
-2.62
-2.62
-2.62
-2.62
-2.62
Source: Compiled by the author(see appendix 1)
Before estimating the model, we also run a causality test to determine the
direction of the relationship between the study variables. We used the
Granger Causality test for this purpose. These techniques helps us to identify
variables that provide significant information for predicting the future of
inflation and this, in turn will provide variables information for policy
markers in designing economic policies. The null hypothesis of this
technique is ;
H0 = GC = 0 (does not Granger Causality)
H1 = GC ≠ 0 (does Granger Causality)
As shown in table (4-3) below;
39
Table (4-3)
Granger Causality test
Null Hypothesis
FStatistic
Pro
b.
lm does not Granger Cause lp
lp does not Granger Cause lm
1.27
1.98
0.29 lm cause lp & lp cause lm
0.15 (feedback)
lgdp does not Granger Cause lp
lp does not Granger Cause lgdp
2.30
2.28
0.12 lgdp cause lp & lp cause lgdp
0.12 (feedback)
lex does not Granger Cause lp
lp does not Granger Cause lex
1.45
4.79
0.25 lex cause lp
0.01
lg does not Granger Cause lp
lp does not Granger Cause lg
1.02
1.25
0.37 lg cause lp & lp cause lg
0.30 (feedback)
lgdp does not Granger Cause lm
lm does not Granger Cause lgdp
3.15
3.83
0.06 lgdp cause lm
0.03
lex does not Granger Cause lm
lm does not Granger Cause lex
4.04
4.78
0.02 lex does not Cause lm
0.01 lm does not Cause lex
lg does not Granger Cause lm
lm does not Granger Cause lg
0.72
13.47
0.49 lg Cause lm
0.00
lex does not Granger Cause lgdp
lgdp does not Granger Cause lex
22.04
2.43
3.00 lex does not Cause lgdp
0.10 lgdp does not Cause lex
lg does not Granger Cause lgdp
lgdp does not Granger Cause lg
0.34
13.66
0.70 lg does not Cause lgdp
9.88 lgdp does not Cause lg
lg does not Granger Cause lex
lex does not Granger Cause lg
0.42
9.97
0.65 lg Cause lex
0.00
Analysis
Source: Compiled by the author (see appendix 1)
We observed that lex cause lp, lgdp cause lm, lg Cause lm and lg Cause lex.
Also we show that there are feedback between lg and lp, lm and lp ,lgdp and
lp(as indicates by F-statistic value).
From these tests it seems all the variables are related to each other in away
or another, accordingly, the empirical study will proceed by considering
40
modeling of the variables in rates of growth; and in case that no satisfactory
results are obtained a first difference model will be applied on the data.
The following equation of the study variables in rate of growth is estimated
and the results are shown in table (4-4)
rpt = b0 + b1ryt + b2rm2t + b3rext + b4rgdt + ut
(4.3)
Where r is the rate of growth and the rest of variables are defined as before.
Table (4-4)
The Model Run in Rate of Growth Form
Variable
Coefficient
T- Statistic
T- Significant
57.27
Standard
Error
28.46
C
2.01
0.05
ryt
-0.05
0.02
-2.23
0.03
rm2t
0.81
0.16
4.88
0.00
rext
0.12
0.08
1.47
0.15
rgdt
0.006
0.001
0.40
0.68
R2 = 0.74
R-2 = 0.71
St. E. of Regression = 20.5
F Statistic = 19.36
F significant = 0.00000
Akiake Information Criterion
9.02
Schwarz Criterion
9.26
DW = 2.1
White Heteroskedasticity Test:
F-Statistic 8.28
Probability 0.00
Obs x R-2
23.27
Probability 0.00
Serial Correlation Test (Breusch - Godfrey):
F-Statistic 0.85
Probability 0.43
Obs x R-2
1.19
Probability 0.54
Normality Test:
Jarque-Bera Statistic 2.26
Probability 0.32
Source: Compiled by the author (see appendix 1)
It’s observed from table (4-4) above, that signs of coefficients of the
explanatory variables (ry, rm2, rex, rgd) are confirmed empirically. The
value of R2 increases from 63% to 74%, the (F-statistic test) for the model
indicates high significance and there is no serial correlation problem
41
between the error terms as D.W. statistic (2.1) shows. And the T-statistic
indicates that the explanatory variables (ry,rm2) and constant are significant,
but rex,rgd, is still insignificant this perhaps indicate the presence of MultiCollinearity between the independent variables . The standard errors of
regression value decreased to 20.5. As shown in the histogram and normality
test, the residuals are normally distributed, that the histogram is bell shaped
and the Jarque-Bera statistic is not significant*.
However, in order to avoid this problem the model is represents in
logarithmic form; as shown below;
lp t = b 0 ± b 1ly t + b 2 lm 2 t + b 3 lex t + b 4 lg d t + u t
(4.4)
Where all variables are defined as before,
Table (4.5), below shows the results of logarithmic form of the model.
Variable
Table (4-5)
Results of the Logarithmic Form
Coefficient
Standard
T- Statistic
Error
TSignificant
C
7.3
2.50
2.93
0.00
lyt
-1.81
0.55
-3.24
0.00
lm2t
1.54
0.51
2.98
0.00
lext
0.49
0.34
1.44
0.16
lgdt
0.01
0.24
0.04
0.96
R2 = 0.40
R-2 = 0.31
D.W. =1.01
St. E. of Regression =0.93
F Statistic = 4.37
F significant = 0.00000
Akiake Information Criterion
2.83
Schwarz Criterion
3.06
White Heteroskedasticity Test:
F-Statistic 1.45
Probability 0.23
Obs x R-2
10.71
Probability 0.21
Serial Correlation Test (Breusch - Godfrey):
F-Statistic
1.26
Probability 0.29
Obs x R-2
2.96
Probability 0.22
Normality Test:
Jarque-Bera Statistic 7.02
Probability 0.02
Source: Compiled by the author (see appendix 1)
42
•
If the residuals are normally distributed, the histogram should be bell-shaped and the Jarque-Bera statistic should not be
significant
That the theoretical signs of coefficients of the explanatory variables (ly,
lm2, lgd,lex ) are confirmed empirically.
The R2 decreased from 74% to 40%. The standard error for regression
decreased from 20.5 to 0.93, the over all test shows significant effects of the
variables (as indicated by the F-value), and there is positive serial correlation
problem between the error terms as D.W. statistic (1.01) Shows. In order to
avoid this problem, Lgd is omitted and the first order autoregressive form is
added, the results as shown in table (4-6) below.
Table (4-6)
Results of the Autoregressive Form
Variable
Coefficient
Standard
Error
T- Statistic
TSignificant
C
9.95
2.95
3.37
0.00
lyt
-1.31
0.62
-2.10
0.04
lm2t
0.60
0.69
0.86
0.39
lext
0.85
0.40
2.09
0.04
ar(1)
0.36
0.16
2.13
0.04
R2 = 0.52
R-2 = 0.42
D.W. =1.9
St. E. of Regression =0.74
F Statistic = 5. 3
F significant = 0.00000
Akiake Information Criterion
2.35
Schwarz Criterion
2.58
White Heteroskedasticity Test:
F-Statistic 4.13
Probability 0.00
Obs x R-2
18.60
Probability 0.01
Serial Correlation Test (Breusch - Godfrey):
F-Statistic
0.24
Probability 0.78
Obs x R-2
0.65
Probability 0.72
Normality Test:
Jarque-Bera Statistic 21.90
Probability 0.00
Source: Compiled by the author (see appendix 1)
43
As seen in the table, lm2 turned out to be insignificant. The model is also
estimated with all variables and third order moving average; the results are
reported in table (4-7).
Table (4-7)
Results of the Moving Average Form
Variable
C
lyt
lm2t
lext
lgt
ma(3)
Coefficient
12.24
-1.96
1.88
1.11
0.24
-0.9
Standard
Error
1.80
0.34
0.39
0.24
0.10
0.02
T- Statistic
6.77
-5.75
2.26
4.60
2.26
-43.70
TSignificant
0.00
0.00
0.03
0.00
0.03
0.00
R2 = 0.77
R-2 = 0.72
D.W. =1.56
St. E. of Regression =0.72
F Statistic = 6.65
F significant = 0.00000
Akiake Information Criterion
1.94
Schwarz Criterion
2.22
White Heteroskedasticity Test:
F-Statistic 0.71
Probability 0.67
Obs x R-2
6.40
Probability 0.60
Serial Correlation Test (Breusch - Godfrey):
F-Statistic 0.29
Probability 0.74
Obs x R-2
0.33
Probability 0.84
Normality Test:
Jarque-Bera Statistic 1.23
Probability 0.53
Source: Compiled by the author (see appendix 1)
As seen the theoretical signs of all explanatory variables are confirmed
empirically, and are statistically significant.
Finally, the model contains the third order moving average variable ma(3), and found that
its better than the model contains the auto-regressive variable of order one ar(1) as shown
by the result of Akaike information criterion (AIC) and Schwarz criterion test (SC)as
shown in tables (4-6),(4-7).
* We reject null hypotheses (H0 = F≥ 1 ) that means there no Hetroskedasticity
44
These results indicate that the model specification in rate of growth of the
variables and in logarithmic forms suffers from specification problems. The
main reason may be that the data contains unit roots in level of variables.
Therefore we specify the model in first difference of variables. It is known
this practice will overlook the information contained in the level of variables
about the equilibrium properties of the model; however, we used this
approach since our primary objective is to obtain point estimates of the order
of magnitude and the direction of the elasticities of the main determinants of
inflation in Sudan.
The following equation derived form equation (4.1) will be used augmented
with lagged difference terms of the dependent variable;
∆ inf t = b 0 + b1∆ m t − b 2 ∆ yt + b 3 ∆ ex t + b 4 ∆ gd t + µt
(4.5)
Where all variables are defined as before. Equation (4.5) has been
estimated in difference form to obtain the residuals, then the
residuals were include and the equation was re-estimated in order
to account for the error adjustment in the model as a proxy for the
error correction. The results of the estimation are reported in
equation form as;
∆linf = -2.9 + 0.23∆linf t
t 1
(1.6)
(0.11)
(-1.8)
(-1.8)
+ 0.41∆linft-2 +0.5∆lext +1.4∆lmt
(0.2)
(1.9)
(0.26)
(2.14)
(0.46)
(3.13)
+0.06∆lgdt – 0.12∆lyt - 0.91Ut
(0.07)
(-0.77)
(0.09)
(-1.33)
(0.37)
(2.44)
R2
0.95
-2
0.88
R
F-statistic 14.0
(Standard errors and t-statistics in parentheses)
45
The theoretical signs of coefficients of the explanatory variables (lyt, lm2t,
lgdt,lext, lgdt,linft-1 and linft-2) are confirmed empirically. It appears that, for
a 10% increase in the deference of inflation rate, ceteris paribus, the lag one
and lag two of deference inflation rate Increase by 6.5%.
Depreciation of exchange rate is an important determinant for inflation in
Sudan. a 5% depreciation will increase inflation by 1%.
Money supply has a coefficient of 1.4% implying that 14% increase in
money increase inflation by 10%. This confirms that the well established
view in the literature that inflation is a monetary phenomenon.
Fiscal deficit, also affects inflation. Output growth decrease inflation, that is
a 1.2% growth reduces inflation by 1%.
If the residuals could be used as a proxy for the error correction towards
equilibrium, the result emphases that inflation in Sudan adjust fast towards
its equilibrium.
That about 88% of the variations of inflation is explained by the explanatory
variables.
And the over-all test (F-statistic) of the model indicates high significant.
Where as the individual (T-Statistic test) for the independent variables
shows that the parameters estimated for (∆lext, ∆lmt,∆linft-1,
different from zero.
46
∆linf - ) are
t 2
4.2. Stability Test:
The stability of the inflation function has a crucial importance to the
effectiveness of monetary policy. In order to predict the effect of change in
inflation on income, money supply, price and government deficit, one must
be confident that the inflation function itself is stable. This stability is
defined in statistical terms as the constancy of the regression over a sample
period. The instability of the inflation function may due to fundamental
structural change in the economy.
As we mentioned above, Chow test requires prior knowledge of the points
that the change is suspected to have taken place. Using this rich the
experience of the study, by identified two periods of time first, the period of
the World Bank Policy in Sudan (1980-1983) and second, the Liberalization
of the economy (1992-2002) . in order to carry the Chow test, the study
estimated the inflation functions for the sub-periods, 1970 to 1990 and1991
to2002, the results are given in table (4-9) below. The calculated F-value is
less than the critical F-value at 5 and 1 percent level. This suggests that the
structure of the inflation relationship remained stable over the estimation
period.
Table (4-9)
Stability Test
Variable Lp
Period 1
Period 2
F- statistic
2.93
4.12
Probability
0.000
0.000
Source: Compiled by the author
47
Figure (4-1)
Graph Series
20
15
10
5
0
-5
70
75
80
85
90
LP
LM
LGDP
95
LEX
LG
48
00
Figure (4-2)
Auto-correlation Graph for Series
Auto-correlation Log M2
Auto-correlation Log GDP
1
1
0.5
AC
0
-0.5
1
3
5
7
AC
AC
0.5
9 11 13 15
AC
0
-0.5
1
3
5
Lag
Auto-correlation Log G
1
1
0.5
AC
0
0.5
AC
AC
9 11 13 15
Lag
Auto-correlation Log EX
-0.5
7
1 3 5 7 9 11 13 15
AC
0
-0.5
Lag
1
3
5
7
9 11 13 15
Lag
49
Auto-correlation Log P
1
AC
0.5
AC
0
-0.5
1 3 5 7 9 11 13 15
Lag
50
Chapter Five
Conclusion and Recommendations:
5.1. Conclusion:
The period 1992-1996 witnessed the application of liberalization’s polices.
However, the macroeconomic stability was not fully materialized, because
of that Sudan was not in a situation to reap the full benefit of liberalization
policies. The end result is that a continuous decline in standard of living and
percapita income and inequality of income distribution and a continuous
increase in inflation rates. Since 1998 there is observed decrease in inflation
rate that because of unification of the exchange rate, which have a big effect
in decreasing inflation rates.
In this study we estimated the inflation function for Sudan based on
theoretical developments in this field. We test the stationarity of the series
by two methods: inspection of graphs and correlgrams as well as by the unit
root test. Also we applied the Granger Causality test to know which variable
cause the other. The specified equations are estimated by the Least Square
Method (OLS.). Various forms of the specified model were estimated. These
include; the model in levels of variables and in growth rate as well as the
first difference of the variables. The major findings can be summarized as
follows;
1. The inflation in Sudan can be explained by, real Gross Domestic
Product (GDP), Broad Money Supply (M2), Depreciation Parallel
Exchange Rate (EX) and Government Deficit (G).
2. Gross Domestic Product (GDP) affect for inflation negatively. This is
known depressing effect of output in inflation. The parallel exchange
rate (EX), Broad money supply (M2) and government deficit affect for
inflation positively. This is compatible with the study hypothesis.
3. There exists a stable inflation model for the Sudan despite changes in
the economy during the period of the study (1970 -2002). The policy
implication of this is that monetary policy has predictable effect on
ultimate economic variables.
51
5.2.
Recommendations:
• The results of this study have revealed that there were a many
factors that had affected inflation during the period under study
(1970 -2002), although it became clear that recent fiscal policies,
starting from 1996 up to now, have successfully curbed the rate of
inflation, compared with previous.
• The study also revealed that effective measures in fiscal and
monetary fields should be taken and considered as top priorities to
prevent any rapid monetary expansion and other structural
rigidities.
• It is clear that government expenditure is the main factor cause of
budget deficit, and financing this deficit has implications for
growth of money supply that is among the major causes of
inflation. So decreasing government expenditure can reduce
inflation.
• Increase in production can be achieved by making use of the
available human and natural resource; both resources are known to
be in abundance in Sudan. It remains for the government to
develop training programs for its human resources and to direct its
expenditure towards sound and sustainable investment programs.
• Promoting saving, especially in private sectors, shall lead to the
reduction of money circulation (velocity rate); which affects
inflation through the increase in money supply.
• Finally; monetary policies should be directed to the productive
sectors in the economy.
52
53