The Impacts of Financial Policies on Inflation Rates in Sudan (1989-2010)

Abstract

The main focus of the present paper is to analyze the impacts of financial policy on inflation rates. The analysis depended on time series data and was divided into theoretical and applied analytical framework. An econometric model was utilized to reflect the relations between financial policy and inflation. Thus, more lights are shed on the fact that the first has great effects on the economic performance within the frame of economic policy and macroeconomic parameters. The analytical framework assumed that there are positive relationships between the independent variables of financial policy components represented in governmental expenditure and taxation and the dependant variable inflation. The results show that there is a negative correlation between total taxation and inflation rates. That means that raising taxes reduces inflation rate which is assumed by suppressing total consumption. However, in underdeveloped economies which already have entrenched poverty such consumption rates are minimized beyond the norms. Moreover, the results show that there is positive correlation between governmental expenditure and inflation rates. Deficit financing is a futile solution for the government to cover gaps between actual resources and the required ones. That instigates the conclusion that reducing inflation rates process should start by minimizing governmental expenditures and adopting austerity measures. The results coincides with the economic theory whereas inflation is correlated with the budgetary formulation which depends on deficit financing factor that may create real gaps between assumed and actual resources for the public budget.