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The Taylor Rule in Egypt: Is it Optimal? Is there Equilibrium Determinacy?

Author

Listed:
  • Maher, Mohamed

    (Department of Economics, Mansoura University, Egypt)

  • Zhao, Yanzhi

    (School of Public Administration, Dongbei University of Finance and Economics, China)

  • Tang, Chuanzhong

    (International Business College, Dongbei University of Finance and Economics, China)

Abstract

We investigate Egypt's Taylor rule (interest rate targeting) between 1976 and 2019 by including the main economic variables in its reaction function. Using the Taylor principle, we investigate Egypt’s monetary policy optimality. To this end, we conduct the generalized method of moments (GMM) estimation procedure with different Taylor rule specifications to deal with potential endogeneity among variables. Our GMM estimates reveal that the partial adjustment coefficient is of considerable magnitude, indicating the explanatory power of policy inertia on many total variations in the current values of the nominal interest rate in Egypt. Furthermore, the inflation gap coefficient violates the Taylor principle, making the policy procyclical and inflation "spiral" and inducing divergence from the long-run equilibrium. Therefore, Egypt's Taylor rule, and thus monetary policy, reflects the indeterminacy of equilibrium and is a passive and destabilizing policy. Besides, the output gap coefficient was unexpectedly found to be insignificant.

Suggested Citation

  • Maher, Mohamed & Zhao, Yanzhi & Tang, Chuanzhong, 2022. "The Taylor Rule in Egypt: Is it Optimal? Is there Equilibrium Determinacy?," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 37(3), pages 484-522.
    • Handle: RePEc:ris:integr:0857
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    Keywords

    Monetary policy; Taylor rule; Taylor principle; Determinacy; Kapetanios test; Structural breaks;
    All these keywords.

    JEL classification:

    • C36 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Instrumental Variables (IV) Estimation
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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