Estimating a Small Open-Economy Model for Egypt: Spillovers, Inflation Dynamics, and Implications for Monetary Policy
IMF Working Papers, May 1, 2011
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- Estimating a Small Open-Economy Model for Egypt: Spillovers, Inflation Dynamics, and Implications for Monetary Policy
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Bibliographic details
- Authors: Elif C Arbatli Saxegaard, Kenji Moriyama
- Published: May 1, 2011
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781455261376.001
Summary
- This paper estimates a small open economy model for Egypt to analyze inflation, output dynamics and monetary policy during 2005-2010.
- The interest rate channel is found to be relatively weak in Egypt, complicating the use of interest rates as the immediate target of monetary policy.
- The paper finds a significant level of persistence in the policy rate, making monetary policy pro-cyclical.
- More active use of interest rate policy, measures to improve domestic debt markets and a gradual move towards inflation targeting can help support a successful disinflation strategy for Egypt.
Key findings
- Interest rate channel: "relatively weak in Egypt" — this complicates use of interest rates as the immediate target of monetary policy.
- Policy-rate persistence: "significant level of persistence in the policy rate," which makes monetary policy pro-cyclical.
- Model focus: inflation dynamics, output dynamics, and monetary policy transmission in a small open-economy framework for Egypt covering 2005-2010.
Policy implications and recommendations
- More active use of interest rate policy.
- Measures to improve domestic debt markets.
- A gradual move towards inflation targeting to support a successful disinflation strategy for Egypt.
Subjects and keywords (as listed)
- Subjects: Exchange rates, Financial services, Foreign exchange, Inflation, Output gap, Prices, Production, Real exchange rates, Real interest rates
- Keywords: exchange rate, Exchange rates, Global, Inflation, inflation dynamics, inflation expectation, inflation inertia, interest rate channel, monetary policy, open economy, Output gap, output gap equation, output gap evolution, Phillips curve, Real exchange rates, real interest rate, Real interest rates, Small open economy model, transmission mechanism, WP