Switching Monetary-Fiscal Regimes in Egypt: Is the Fiscal Stimulus Necessarily Good in Bad Times?

This paper investigates the monetary-fiscal interaction in Egypt for the period 2001Q1 to 2020Q2, a period that includes several reform programs, the 2011 revolution but also the global financial and the Covid-crises. Markov-switching regression methods are employed to estimate fiscal and monetary policy feedback rules in Egypt and the overlay of the smoothed probabilities is used, in the spirit of Davig and Leeper (2007), to show the estimated timing of the joint monetary-fiscal regime and depict its evolution. A sign restricted vector autoregression (SRVAR) model is then used to analyze the effects of different potential fiscal-monetary policy mixes, similar to those undertaken by different governments the during the coronavirus pandemic, on macro variables in Egypt. Three main findings emerge from the analysis. First, fiscal policy in Egypt always responds to government debt, although the magnitude of this response differs throughout the periods. Second, regime-switches in monetary and fiscal policy rules do not exhibit any degree of synchronization which represents a novel way of tracking the time-series behaviour of government debt and inflation in Egypt. Third, the effect of a fiscal stimulus on real consumption and GDP in Egypt does not outlive the stimulus due to a Ricardian Equivalence effect, where agents expect higher future taxes to finance deficits resulting from the stimulus. This effect can be mitigated with an accommodating monetary policy, at the expense however of inflationary pressures that inflation targeting central bank will have to face.