Abstract
According to economic theory, the change in any economic variables may affect another economic variable through the time and these changes are not instantaneously, but also over future periods. The Autoregressive distributed lag (ARDL) model has been used for decades to study the relationship between variables using a single equation time series. The ARDL model is one of the most general dynamic unrestricted models in econometric literature. In this model, the dependent variable is expressed by the lag and current values of independent variables and its own lag value. The paper studies the dynamic causal relationships between inflation rate, foreign exchange rate, money supply, and gross domestic product (GDP) in Egypt during the period 2005: Q1 to 2018: Q2. Using the bounds testing approach to cointegration and error correction model, developed within an ARDL model, we investigate whether a long-run equilibrium relationship exists between the inflation rate and three determinants (foreign exchange rate, money supply, and GDP). The results indicate that the exchange rate and the growth in money supply have significant effects on the inflation rate in Egypt, while the real GDP has no significance effect on the inflation rate
Highlights
The autoregressive distributed lag (ARDL) model is considered a standard least squares regression with lags of both independent and dependent variable as regressors, see Greene (2008)
ARDL model have been used in econometrics for decades, they have gained popularity recently as a method of checking cointegration between economic variables proposed by Pesaran and Shin (1999) and extended by Pesaran et al (2001)
According to Pesaran and Shin (1999) and Pesaran et al (2001), the ARDL test can be adopted for applying cointegration analysis to empirically determine the relationship among the economic variables that is regardless the regressors are stationary at its level, integrated of order one, or a mixture of both
Summary
The ARDL model is considered a standard least squares regression with lags of both independent and dependent variable as regressors, see Greene (2008). There are number of cointegration techniques, according to Emeka and Kelvin (2016), the econometric terminology of “cointegration” is used to reflect the existence of a long-run equilibrium among economic variables that converges over time and ARDL approach is considered as a latest of these cointegration technique used to examine dynamic and equilibrium relationships between dependent variables and independent variables. According to Pesaran and Shin (1999) and Pesaran et al (2001), the ARDL test can be adopted for applying cointegration analysis to empirically determine the relationship among the economic variables that is regardless the regressors are stationary at its level, integrated of order one, or a mixture of both. Haug (2002) mentioned that the ARDL approach is better with a small sample Ghatak and Siddik (2001) argued that the Johansen cointegration test requires a large sample to find a valid result
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