Abstract
The purpose of this paper is to examine the nominal exchange rate pass-through to domestic prices in Sudan from 1978–2017. An autoregressive distributed lag (ARDL) approach to cointegration is employed. The analysis is based on impulse response functions (IRFs) and forecast error variance decompositions (FEVDs). The dynamics of the cointegrated system can be investigated via the variance decompositions and IRFs. The findings confirm that the degree of exchange rate pass-through in Sudan is incomplete, and the empirical results also show that the domestic price index is predominantly caused by foreign price in both the short and long runs, in addition to the import price index and the nominal exchange rate; the exchange rate shock has a negative effect on the domestic price. Furthermore, FEVDs analysis illustrates that the variation in domestic price is primarily determined by the import prices, while changes in the exchange rate are primarily determined by the exchange rate itself.
Highlights
An important issue in international economics relates to the relationship between exchange rate movements and changes in the price of traded goods; this phenomenon is known as the exchange rate pass-through (ERPT)
The short-run dynamics and movement toward equilibrium can be captured with the vector error-correction model (VECM), in which the long-run equilibrium relationship enters into a short-run model (Pesaran & Shin, 1995)
Second-stage pass-through: We examine whether exchange rate and import price shocks have an effect on consumer prices using estimates of impulse response functions and variance decomposition
Summary
An important issue in international economics relates to the relationship between exchange rate movements and changes in the price of traded goods; this phenomenon is known as the exchange rate pass-through (ERPT). The ERPT is the percentage change in the import price due to a one percent change in the exchange rate between the importing and exporting country As a result of the communication revolution, the whole world is becoming a single market, where consumers and producers can contact one another. Due to the elimination of capital controls, switch from fixed to floating exchange rate regimes, and the degree of openness—the greater the degree of openness, the larger the ERPT—ERPT has become increasingly important in developing and emerging market economies
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