Monetary Policy In Egypt Research Articles

Is the Augmented Taylor Rule best describe the conduct of monetary policy in Egypt from 2006 to 2020

Is the Augmented Taylor Rule best describe the conduct of monetary policy in Egypt from 2006 to 2020

Examining Monetary Policy Cyclicality in Egypt during Crisis Time: Global Financial Crisis versus COVID-19 Pandemic

Egypt has been exposed to two recent shocks: the global financial crisis of 2008 and the COVID-19 Pandemic of 2020. Though the origin and the implications of the two shocks are quite different, they bear some similarities in terms of the sharp decline in global economic growth and negative implication on the Egyptian economy. The present study attempts to assess the cyclicality of monetary policy in Egypt during the two crises. To this end, both descriptive and econometric techniques are employed in this study to reveal the cyclicality of monetary policy. On the descriptive side, the correlation between the cyclical component of policy rate and that of real GDP is calculated. Moreover, both an ARDL and NARDL approach are estimated to derive the augmented Taylor rule for the cyclical component of policy rate. Two dummy variables reflecting the two crises along with their interaction with output gap are incorporated in the model to disentangle the impact of the two crises upon monetary policy cyclicality. The study concludes that monetary policy in Egypt is more acyclical and that its response to changes in output gap is statistically insignificant, during both normal times and crisis time.

Exchange Rate Pass-Through, Inflation, and Monetary Policy in Egypt

Exchange Rate Pass-Through, Inflation, and Monetary Policy in Egypt

Interest rate setting in Egypt: a NARDL approach for estimating backward-looking monetary policy reaction function

ABSTRACT The role of inflation versus output and exchange rate in designing monetary policy in Egypt has been subject to considerable debate in literature, even after the proclamation of price stability as the monetary policy objective in 2004 and the adoption of flexible exchange rate system in 2016. This study aims to investigate the main drivers of interest rate setting in Egypt throughout the period from 2005 to 2019. In this context, both an ARDL and NARDL econometric techniques are employed to estimate the backward-looking augmented Taylor monetary policy reaction function. The estimated equation estimates policy rate as a function in lagged inflation, lagged output gap, lagged policy rate, change in real effective exchange rate, in addition to other variables. The importance of this study arises from the lack of recent studies assessing interest rate setting in Egypt. The study concludes that monetary policy in Egypt has been accommodative to inflation and that Central Bank of Egypt responds asymmetrically to shocks in inflation, output and exchange rate.

The Impact of Interest Rate Movement on Consumption and Output

Interest rate is considered one of the most important tools of monetary policy in Egypt, and it is the most used to maintain price stability and tackle inflation, here we study its effect on consumption and income in an econometric technique. This research is concerned with the study of the impact of interest rate shocks as an indicator of monetary policy on household consumption and Income in Egypt during the period from 1980 to 2018. The research applies the quantitative analysis approach and uses the econometric model to deduce results and uses a Small Structural Vector Autoregressive Model (SVAR). The research concludes that one standard deviation shock in interest rate shrinks consumption, but this very small and fast decrease is almost insignificant, while income initially increases in response to this positive shock. On the other hand, a negative shock in consumption causes a reduction in interest rate. the research also indicated a mutual relationship between consumption and income

Estimation of Monetary Policy Reaction Function and Inflation Function under Fiscal Dominance in Egypt

The Egyptian economy has been suffering from a high and persistent budget deficit as a percentage of GDP over the past decades. The need to finance this deficit emerged through the inflationary monetary financing of the Central Bank of Egypt or by purchasing government debt. This resulted in the accumulation of public debt from internal and external sources. The purpose of this study is twofold: The first is to test the extent of fiscal dominance over monetary policy in Egypt and assess the dynamic behavior of inflation, considering the impact of real, monetary and financial factors under the fiscal dominance. The second is to prioritize monetary policy by estimating the CBE's response function. The results of the study showed that the dominance of the monetary policy is deeply rooted in the Egyptian economy through monetary financing of the budget deficit and the government's absorption of a large part of the net domestic credit of the Central Bank. The results of assessing the reaction of the central bank confirmed the existence of multiple and conflicting monetary policy objectives to target the stability of the exchange rate, stabilize the inflation rate and increase the real output growth rate; but the highest priority was to maintain the exchange rate stability more than targeting inflation.

Much Ado about the Egyptian Pound: Exchange Rate Misalignment and the Path Towards Equilibrium

Abstract This paper estimates Egypt's equilibrium real exchange rate and exchange rate misalignment based on economic fundamentals over the period 2001Q3–2017Q3. Focusing on the more recent period, we find that the Egyptian pound was undervalued by about 22.3% in 2017Q1 due to overshooting its equilibrium value after floating the currency in 2016Q4. The currency undervaluation then declined to 18.5% in 2017Q3 driven by an increase in the real effective exchange rate due to a surge in domestic inflation. With regard to the determinants of the equilibrium real exchange rate, we find the productivity differential (vis-à-vis Egypt's trade partners) and trade openness to be the most significant factors. We also provide projections for the equilibrium real exchange rate and exchange rate misalignment until 2020Q4, which reveal that the exchange rate undervaluation will be dissipating fast due to high inflation. If the nominal exchange rate stabilizes at its level in 2017Q3 (17.73 pounds per US dollar), the currency will be overvalued by 13.1% in 2020Q4. Given the uncertainty surrounding the projections, a forecast combination approach is also presented. Finally, the paper highlights the implications of the empirical findings for the conduct of monetary policy in Egypt.

Asymmetric Effect of Monetary Policy in Emerging Countries: The Case of Egypt

The aim of this study is to explore the asymmetric effect of the unanticipated monetary policy shocks on inflation and real production. This is done by utilizing the non-linear autoregressive distributed lag (ARDL) model. Nonlinear ARDL allows us to check for the asymmetric effect of the policy in terms of the size of the shocks: large or small, and the stance of the shocks: loose or tight. Additionally, Wald test is employed to confirm the underlying relationship. The results provided a sufficient evidence for the idea of the asymmetric effect of monetary policy in Egypt. Firstly, regarding the size of the policy, only small shocks have a considerable effect on both inflation and real production. Secondly, regarding the direction of the policy, only positive shocks have a considerable influence on both variables. Wald test confirmed the abovementioned results. Therefore, based on these results, the monetary policy in Egypt is only effective under some circumstances and thus other economic policies such as fiscal policy might be more effective in these cases.

Structural breaks and monetary dynamics: A time series analysis

This article investigates the stability of money demand and implications for the conduct of monetary policy in Egypt. The econometric procedures include testing for structural breaks at unknown dates and conditioning on the most recent break for estimation and forecasting. Test results provide evidence for regime shifts and lend support to the use of short-term interest rate as the main policy instrument. Sources of structural change are detected by a state-space model. Also, using a structural vector autoregressive (VAR) model for short-run dynamics, it is found that narrow money is a more appropriate monetary aggregate for policy analysis.

The Bank Lending Channel of Monetary Policy? The Panel Evidence from Egypt

This paper examines the relevance of the bank lending channel of monetary policy in Egypt using bank-level data. Previous empirical studies in Egypt that used macro-level data have not supported the relevance of the bank lending channel. However, using a sample of 32 commercial banks for the period from 1998 until 2011 and a dynamic panel GMM technique, the empirical findings revealed the relevance of the bank lending channel of monetary policy in Egypt. Moreover, there is a heterogeneity effect of monetary policy on bank loans according to bank size, in which the small banks are more affected during a monetary contraction than larger banks. This finding signals that the monetary authorities in Egypt should take cognizance of the stability of interest rates in order to stabilize the bank loan supply.

Markov Switching and State-Space Approaches for Investigating the Link between Egyptian Inflation Level and Uncertainty

In this paper, we use the Markov switching model, the state-space model with Markov switching heteroskedasticity and the local level model with GARCH(1,1) disturbances to investigate the link between the level of Egyptian inflation and its uncertainty. We use different ways to measure inflation uncertainty. First, we consider it as the variance of unanticipated inflation. Second, we measure it as the unconditional variance of unanticipated changes in inflation. Finally, we measure it by the conditional variance modeled as GARCH effect. We find evidence of a positive effect of inflation level on inflation uncertainty for the three models. By making the distinction between the long run and the short run, we conclude that inflation has a significant positive effect on uncertainty in the short run but no effect in the long run. We state that the cost of inflation is mainly due to the association between higher inflation and higher short-run uncertainty. Reversing the causality link between inflation and its uncertainty, we find that inflation uncertainty has a positive effect on inflation level in the short run but this effect dies out in the long run, which is indicative of a stabilization monetary policy in Egypt. According to the likelihood-based information criteria (Akaike and Schwarz Bayesian criteria), the state-space model with Markov switching heteroskedasticity and the two-state Markov switching model outperform all others.

Why Has the Central Bank of Egypt Been Unable to Achieve The Goal of Price Stability Under the Economic Reform Program?

This paper assesses the performance of the monetary policy in Egypt during the periods following the introduction of the economic reform and structural adjustment program (ERSAP). It sets out to answer the question why the Central Bank of Egypt (CBE) has not been able to achieve the goal of price stability under the ERSAP? The study compares the economic performance from the 1990s with both its counterpart in Germany, during the same periods, and with the economic performance of the Egyptian economy during the periods before the 1990s, i.e., 1975-1990. The study concludes that the CBE could have brought the rate of infl ation down; nevertheless, the unemployment and real GDP growth rates have worsened and a price stability is still far away. The failure to achieve price stability is explained by two reasons, namely, a conflict between monetary policy objectives and a chronic budget deficit financed by issuing new money.

Are Structural VARs with Long-Run Restrictions Useful for Developing Monetary Policy Strategy in Egypt?

On the basis of SVAR models of monetary policy in Egypt for the period December 1976–May 2006, our paper explores a new empirical assessment for the interest rate channel in correcting trouble in the Egyptian economy by imposing contemporaneous and long run restrictions. It appears that after a monetary policy expansion, output is stable in the first period, rises temporarily reaching the baseline at t = 40, and the global monetary aggregate rises but not significantly. In addition, the price level rises with great difficulties in response to a negative interest rate shock to the global liquidity aggregate. The excess of money supply has a transitory effect on the Egyptian output but it causes inflation pressures. SVAR Blanchard and Quah (1989) estimation reveals contradictory results to the previous findings. Last but certainly not least, this means that the effect of bank lending and the interest rate channels on the economy are limited in time. The paper shows that the transmission of monetary policy through the interest rate channel has become weak in the short run but more important in the long run. Nonetheless, the bank lending channel through the commercial bank lending is not a potent monetary transmission mechanism.

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

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.