Co-integration and Error Correction Modeling of the Demand for Money Function in Sudan1960 – 2004

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Suliman Zakariea Suliman, Abdallah
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University of Khartoum
The study tried to test whether there exist a stable money demand function for the Sudan during the period (1960 – 2004). The money demand function includes real money balances, real GDP (as scale variable), the rate of inflation and exchange rate (as opportunity cost of holding money balances). The study applied cointegration analysis and error – correction models to examine the behaviour of money demand during the period of analysis, all the included variables have been expressed in logarithm form with the exception of inflation rate. Based on time series data (annually observations), Cointegration analysis revealed that in the long-run there is a relationship between real money balances and the explanatory variables included in the model. In this relationship, the obtained empirical results were consistent with the economic theory behind demand for money. Error Correction Model (ECM) has been used to estimate the short-run money demand function, in which the estimated coefficients were found consistent with the theory, and generally weaker in magnitude than those related to long-run equilibrium. The study established a stable money demand function in Sudan during specified period, stability tests confirmed this finding
67 Pages
Co-integration ,Error Correction, Modeling , Demand , Money Function ,Sudan