Asymmetric Exchange Rate Pass-through in Sudan: Does Inflation React Differently during Periods of Currency Depreciation?

Abstract

Using the nonlinear autoregressive distributed lags model, we confirm that the response of consumer prices to the changes in the exchange rate is asymmetric in the short and long run. The analysis reveals that moderate inflation is associated with currency depreciation while no material effect is observed during appreciation in the short run. In the long run, depreciation is passed through to consumer prices rather than appreciation. We find that 10 per cent depreciation in the Sudanese pound leads to approximately an eight percentage point increase in consumer price levels. The result — inflation in Sudan is largely driven by sharp depreciation episodes — suggests the need to mitigate the disruptive effects of sharp depreciations. We find that the impact of oil price shocks on domestic inflation is insignificant, a finding that is consistent with the recent international evidence.