EXCHANGE RATE VOLATILITY IN SUDAN: A STUDY OF EXCHANGE RATE SYSTEMS

Abstract

Exchange rates play a pivotal role in the global economy, measuring the value of one nation's currency against others. This valuation varies based on the exchange rate system in place. Fixed exchange rates are set by monetary authorities, while floating rates are determined by market forces of supply and demand. The significance of exchange rates is widely debated in the literature, primarily due to their influence on a country's international competitiveness and financial stability. Exchange rate stability, especially in developing countries, is a critical objective. A stable exchange rate attracts foreign investment, enhances productivity, promotes trade, and bolsters economic stability. Conversely, exchange rate instability hampers investment, disrupts resource allocation, discourages foreign capital inflows, fuels inflation, and worsens trade balances. Consequently, exchange rate determination and stability are of paramount interest to academics, policymakers, and market practitioners. Despite numerous theoretical models attempting to predict exchange rates, the subject remains contentious in international finance literature. It is widely agreed that exchange rate volatility reflects macroeconomic factors' fluctuation. Researchers focus on explaining exchange rate behavior concerning a set of macroeconomic fundamentals. These factors encompass income growth, inflation, interest rates, fiscal and current account balances, foreign exchange reserves, financial and trade openness, and the nature of capital flows, each varying by country.