Exploring the role of the exchange rate in monetary policy in Egypt

Abstract EN

Recent reforms have enhanced the monetary policy framework in Egypt.

Yet, there is not yet full transparency with respect to other policy objectives besides inflation, namely the stabilization of the exchange rate, which was officially abandoned as a nominal anchor in 2003.

Against this backdrop, this paper seeks to characterize the systematic behavior of Egyptian monetary policy.

It follows Clarida, Galí and Gertler (CGG) (1998) to estimate a forward-looking interest rate rule for Egypt using monthly data between 2000 and 2008.

The results of a baseline model in which the Central Bank does not take into account the exchange rate allows us to examine whether interest rate setting responds to inflation, the output gap and a lagged interest rate.

The results are then compared with those of a model in which the exchange rate is added as an explanatory variable.

The empirical analysis shows that monetary policy has accommodated inflation and has not been forward-looking and does not provide evidence of a systematic reaction to changes in the exchange rate.