Money Supply and its Impact on Inflation

(An analytical study in the Sudanese economy during the period 2006-2021)

Abstract

The aim of this study was to measure the impact of money supply on inflation in the Sudanese economy and to avoid the serious economic and social effects of the worsening problem of inflation in Sudan. To determine the nature of the relationship between money supply and the average annual inflation rate, the study used the descriptive method in the theoretical framework and the analytical method in the applied side. The model was estimated using the STEP WISE method to verify the existence of a causal relationship between money supply and the annual inflation rate. Based on data analysis represented in money supply as a dependent variable and average annual inflation rate as an independent variable for a time series extending from 2006-2021. Through diagnostic tests, the study found a causal relationship between money supply and the average annual inflation rate. Therefore, the purchasing power of money decreases and the level of economic activity in the country decreases accordingly. This means that changes in the general price level are related to changes in money supply in the same direction and to the same extent. The insignificant intercept indicates borrowing from the monetary mass outside the banking sector, which has a negative impact on the economy. The study results indicate that inflation in Sudan is a monetary inflation resulting from the intervention of the state through the central bank in increasing the money supply and increasing the supply of money in the market. The estimated model has an excellent ability to predict very close convergence between actual and predicted values. Therefore, the study results can be relied upon for analysis purposes, evaluating policies and making economic decisions regarding inflation in Sudan.