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Exploring the Role of the Exchange Rate in Monetary Policy in Egypt

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  • Hoda Selim

    (Economic Research Forum)

Abstract

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.

Suggested Citation

  • Hoda Selim, 2012. "Exploring the Role of the Exchange Rate in Monetary Policy in Egypt," Working Papers 733, Economic Research Forum, revised 2012.
    • Handle: RePEc:erg:wpaper:733
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    Cited by:

    1. Amr Sadek HOSNY, 2014. "Is Monetary Policy in Egypt Backward or Forward-Looking?," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 14(2).
    2. Hakan Yilmazkuday, 2008. "Structural Breaks in Monetary Policy Rules: Evidence from Transition Countries," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 44(6), pages 87-97, November.

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