Test of relationship between Exchange Rate and Inflation in South Sudan: Granger-Causality Approach

Abstract

Using Granger-causality approach, this study was intended to establish the relationship between exchange rate and inflation measured by CPI in South Sudan using time series monthly data for the period August 2011 to November 2014. The study reveals that there exists a unidirectional causality from exchange rate to CPI without feedback. This means depreciation of South Sudanese currency is detrimental to the economy of South Sudan. Although CPI failed to cause changes in exchange rate, there is no way to conclude with greater confidence that the results are true. The effect of the pressure of an increase in price level on exchange rate could have been from the response of monetary authorities in bridging the gap between the price level and the purchasing power of people in the economy. In South Sudan, with no response from the monetary authorities to increase money supply, the effect of increase in prices on exchange rate has been suppressed and only manifests itself in terms of suffering encountered by the economic actors with consumers and mainly the low-income consumers hit hard.Given the results, there is a need for the authorities to manage the exchange rate and save the domestic currency from depreciation. In search of more information, the study recommends further research to be conducted with the aim of establishing the weaknesses and strengths of South Sudan Central Bank management in carrying out effective monetary policies in the country.

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