The Asymmetric Impact of Exchange Rate on Inflation in Egypt Since 2013

Abstract

This paper aims to analyze the impact of exchange rate changes on the price level in Egypt since 2013. The objective of this study is not only to test the existence of such relationship but also to identify to what extent the inflation responds to exchange rate are different by the direction of this change. In order to test this asymmetric impact of exchange rate on inflation, Nonlinear Auto Regressive Distributed Lag model (NARDL) is used. This model could capture not only the cointegration between the two variables, but also the asymmetric exchange rate pass-through inflation.The analysis shows that exchange rate has a significant impact on inflation in Egypt in the short run and long run,and that this impact is asymmetric. Inflation responds only to the positive changes in the exchange rate in both short run and long run, while negative changes were insignificant.