Impact of Monetary Policy Instruments on Exchange Rate Volatility in Sudan (1997-2017)

Abstract

This paper analyzed the impact of monetary policy instruments on real exchange rates volatility in Sudan during the period 1997-2017. The paper applies co-integration analysis to examine short run relationship between monetary policy determinants of real exchange rate. At first the stationary of the variables at first differences is obtained, then Vector Error Correction model (VECM) was estimated to explain the existent of long run relationship, after establishing the short run co-integrating relation among set of incorporated variables. The result from the paper show that, real exchange rate in Sudan have unstable during the period of study. In the short run, the variation in monetary policy instruments, namely money supply (MS) and profit margin rate (PMR) variable explain the movement of real exchange rate volatility through a self correction mechanism process with many interventions from central bank of Sudan. Moreover , the result from VECM test show that an increase of money supply have negative impact on real exchange rate volatility, such that a change in the value of money supply variable causes exchange rate volatility, while profit margin rate have positive impact on real exchange rate volatility in Sudan and there is possibility of self-adjustment of the model. The paper recommended the important of increasing the quantity of money supply as crucial policy to restore previous equilibrium level.