A temporary general equilibrium model with endogenous money for economic policy analysis in Sudan

Abstract

The question of what policy options Sudan can choose to emerge from its current economic crisis of persistent inflation, unsustainable external and internal imbalances, and negative growth in real output is addressed in this study. An empirical general equilibrium model is constructed, validated and used to research the nature, causes and possible remedies for the economic problems of Sudan. The model is based on the multi-sector Walrasian equilibrium structure. Keynsian macro-features recognizing short-run adjustment dynamics, sticky prices and an endogenous monetary mechanism are also incorporated. The model allows for less than perfect flexibility in some markets such as the foreign exchange and domestic capital markets due to price rigidities. Partial adjustment in some agricultural sectors where supply lags exist are also modelled. The economy is disaggregated into 16 sectors. Detailed supply and demand specifications are given for each sector in the model. The general price level together with other nominal and real flows are endogenously determined in this model;Econometric methods are used to estimate the model parameters. This provided superior statistical basis for model predictions over calibration. A jacobian algorithm (GAMS/MINOS) is employed to solve the model for equilibrium in the product market. Validation and policy analysis are conducted using dynamic simulation. The model showed powerful performance in recovering the historical path of the economy;Policy experiments indicated that the economy is non-responsive to movements in nominal interest rates as the domestic credit market is highly controlled. Removal of the institutional rigidities in the domestic capital market is therefore necessary for effective monetary control and efficient allocation of capital resources in Sudan. Simulation results also provided further empirical support to the argument that expansionary fiscal and monetary policies have worked against stabilization and economic recovery in Sudan. The thesis objecting to removal of indirect taxation for budgetary reasons is challenged by the tax policy experiment results. The results of the six policy experiments suggested that for positive growth and improved performance of the Sudan economy, monetary control and minimal indirect taxation are required to support exchange rate adjustments.