Adjustments and Error Corrections in Money Demand During High Inflation: A Case Study of Sudan

Abstract In this paper an attempt to derive a stable money demand function for the Sudan is undertaken. Sources of instability in money demand stem from the occurrence of a high and rapidly accelerating inflation. Traditional money demand adjustments and error corrections are compared using specification searches from general to specific to define the dynamic mechanism combining the conventional corrections and adjustments. Particular attention is paid to the possible roles of buffer stocks, budget finance and currency substitution effects as determinants of money holdings. Due to the presence of high inflation, it is observed that traditional error correction and adjustment mechanisms may not be adequate. Consequently, and in line with Cagan-type mechanisms, we stipulate that corrections and adjustments in money demand are undertaken with respect to inflationary expectations instead of income. Results obtained on these specifications substantiate the adequacy of this alternate formulation. Arabic Abstract: