The Monetary Transmission Mechanism in Egypt

Abstract

This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. This paper examines the monetary transmission mechanism in Egypt against the background of the central bank's intention to shift to inflation targeting. It first describes the changing transmission channels over the last decade. Second, the channels are evaluated in a VAR model. The exchange rate channel plays a strong role in propagating monetary shocks to output and prices. Most other channels (bank lending, asset price) are rather weak. The interest rate channel is underdeveloped but appears to be strengthening since the introduction of the interest corridor in 2005, which bodes well for adopting inflation targeting over the medium term.

Inflation in Egypt: Internal or External Driven?

“…This¯nding concurs with earlier studies on Egypt such as Moursi et al (2007) and Al-Mashat and Billmeier (2008). It is worth mentioning, however, that these two studies did not use the overnight interbank rate as there was a lack of a clear-cut short-run policy interest rate in Egypt at the time those studies were conducted.…”

“…Moursi et al (2007), therefore, decided to create an index of monetary policy in Egypt to accurately trace periods of monetary tightening and easing over the period 1985-2005. This index was later used by Al-Mashat and Billmeier (2008). Our¯ndings in this paper seem to suggest that although the overnight interbank rate is the main operational target of the CBE (see CBE, Many issue), it appears that it is still not able to a®ect in°ation.…”

How effective is monetary transmission in low-income countries? A survey of the empirical evidence

“…Al- Mashat and Billmeier (2007) built on the Moursi, Mossallamy, and Zakareya (MMZ) analysis for Egypt by using their measure of the intermediate target of monetary policy in a VAR with the form (Y, P, R MMZ , S), with the international oil price and the US Federal Funds rate included as exogenous variables in the VAR. R MMZ was the monetary policy indicator constructed by MMZ.…”

Financial crisis, monetary policy reform and the monetary transmission mechanism in Turkey

“…This study uses a VAR in levels for several reasons. For models with non-stationary and cointegrated variables, the parameters and the impulse responses of a VAR in levels are estimated consistently (Hamilton, 1994, Sims, Stock andWatson, 1990 (Peersman and Smeets, 2001;Favero 2001;Al-Mashad and Billmeier, 2007).…”