Estimation of monetary policy reaction function and inflation function under fiscal dominance in Egypt Mohamed Sayed Abed.

Abstract EN

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 orption 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.