The Sources of Inflation in Egypt: A Multivariate Co-integration Analysis

Abstract

The aim of this paper is to empirically investigate the sources of inflation in Egypt. For this, price dynamics is herein represented by a vector error-correction model, which we use to test for the existence of a long-run relationship between the consumer price index, real gross domestic product (GDP), the exchange rate, interest rate, money supply and world prices. Then using the augmented VAR approach, we test for Granger non-causality between the different variables and inflation. The main results that are of interest to monetary policy in Egypt suggest that structural reforms based on improving the country’s productive capacity, shrinking the budget deficit and credit to the government, are crucial for controlling inflation.