Can Exchange Rates and Interest Rates Affect Macroeconomic Indicators (inflation, unemployment & economic growth)? The evidence from Egypt

Abstract

The study analyzed the effects of both the exchange rates and the interest rates simultaneously on the selected indicators of the macroeconomic performance in Egypt over the period from 1991 to 2020. And in order to do that, the Engle-Granger two-step Co-integration model is applied to estimate the short and long-term relationships between variables. And it was found that the exchange rate & the interest rate, each one of them in the presence of the other, had no effect on the unemployment rate and economic growth rate. Although the interest rate and exchange rate, each one of them in the presence of the other, had an effect on the inflation rate in the long run. And only the interest rate, in the presence of exchange rate, had an effect on the inflation rate, while the exchange rate, in the presence of interest rate, had no effect on inflation in the short run. Since increasing both the exchange rate and interest rate by one unit increased inflation rates by 0.510 and 0.892, respectively, in the long run. And in the short run, increasing interest rates by 1 unit increased inflation by 2.161.