Determinants of Inflation and its Instability in Sudan 1970 – 1994

Abstract During the past three decades inflation in Sudan accelerated and was highly variable. Various factors contributed to this acceleration and variability. Predominant among these is the monetary financing of a persistent budget deficit in the country. Other real, expectational and structural factors also contributed to the incidence of this high inflation episode witnessed in the country. This paper investigates the sources of instability in both the mean and variance of inflation. Account of the shifting means is undertaken by shift dummies whereas account of the variable variance is undertaken via Autoregressive Conditional Heteroscedasticity (ARCH) and Error Correction (EC) estimation mechanisms. The analysis exploits recent results on cointegration given the obvious nonstationarity of the data within the high inflation context. We also trace the nominal, real, structural and expectational determinants of the Sudan inflation.