What can SVAR models tell us about the impact of Monetary Policy shocks on Aggregate Demand components and Inflation in Egypt? | ||
| المجلة العلمية للبحوث التجارية (جامعة المنوفية) | ||
| Article 15, Volume 54, Issue 3, July 2024, Pages 9-38 PDF (1.27 M) | ||
| Document Type: المقالة الأصلية | ||
| DOI: 10.21608/sjsc.2024.288031.1447 | ||
| Author | ||
| Ahmed Elkhadrawi* | ||
| Galleria moon valley compound, fifth settlement, Cairo, Egypt | ||
| Abstract | ||
| The purpose of this paper is to investigates monetary policy shocks and their effects on aggregate demand components and inflation within the Egyptian context. In the empirical analysis of the SVAR models applied to quarterly data covering the period 1991–2022, we found the following: First, a higher interest rate policy by the CBE, which aims to contain inflation, produces a large negative shock to private investment and consumption but only a small inflation response, which does not suffice to reverse the worsening trend of inflation. Second, it suffices that the exchange rate deterioration does not counteract the so-called "pass-through" effect. Third, it is the exchange rate, not the inflation rate, that is Granger-causal for monetary policy. Fourth, relying solely on the exchange rate to correct the structural trade deficit has no sufficient impact on removing it. Based on these conclusions, we recommend the following: first, a change in monetary policy toward an inflation-targeting, rule-based set of policies, with a clear and transparent role assigned to the exchange rate, may raise the credibility of the CBE and the effectiveness of monetary policy; and second, Egyptian policymakers should also consider intertemporal alignment of monetary policy with supply-side measures aimed at sustainable growth and unsustainable fiscal and external imbalances—to achieve price stability. | ||
| Keywords | ||
| Monetary policy shocks; aggregate demand components; exchange rate; inflation; SVAR | ||
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