The effects of Exchange Rate Changes on Sudanese Output: An Asymmetric Analysis using the NARDL Model

This study tests the hypothesis that the real effective exchange rate changes have an asymmetric impact on the domestic output in Sudan from 1960 to 2020.The analysis uses a multivariate framework by controlling for the various channels through which exchange rate changes could affect domestic output.To disentangle the potential asymmetric impact of exchange rate changes on domestic income, we use the nonlinear autoregressive distributed lag (NARDL) framework to separate real currency appreciations from depreciation.Results of the NARDL model show long-run asymmetry in the effect of real currency appreciations and depreciations.In particular, real currency appreciations (depreciations) have an expansionary (contractionary) effect on domestic output.There is a considerable difference in the magnitude of the effect of the positive exchange rate shocks compared to the negative shocks, in which the magnitude of the effect of the real currency appreciations on domestic output is almost double that of the real currency deprecations.The results also show that fiscal policy has no statistically significant effect on domestic output, while monetary policy has a statistically significant long-run contractionary effect.Monetary authorities in Sudan can use the real exchange rate as an effective instrument to affect domestic output in the long run.