Investigating the Impact of Foreign Portfolio Investment on Macro-Economic Stability: Empirical Evidence from Egypt

Abstract

Foreign Portfolio Investment (FPI) flows have fluctuated significantly in the Egyptian stock market from 1993 to 2020. This high volatility of FPI has drawn attention to assess its possible effects on the Egyptian economy in terms of macroeconomic stability. Therefore, this study aims to empirically investigate the relationship between FPI flows and the inflation rate, which is a critical indicator of macroeconomic stability. For this purpose, the study applies a vector autoregressive (VAR) model to test the short-run dynamics among the variables of interest. Also, it conducts the granger-causality test to check the causalities among variables. Additionally, it applies the auto-regressive distributed lag (ARDL) model to examine the long-run relationships among these variables. An error correction (ECM) can then be applied by analyzing both the short-run and long-run relationships among the model variables. Empirical results showed that FPI flows increase the inflation rate in Egypt in both the short-run & long run, thereby negatively impacting the macro-economic stability of the Egyptian economy.