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The Impact of Recent Innovations in Monetary Policy on the Monetary Transmission Mechanism in Egypt

  • Ibrahim L. Awad

The study set out to answer the following two questions: (i) How far can foreign economic shocks explain the behavior of domestic real GDP and domestic price level compared with domestic economic shocks? (ii) Has the reaction function of the central bank of Egypt (CBE) differed in the last few years? Using monthly data on the periods 1998-2002 and 2004-2009, the study estimated a structural VAR model in which the Egyptian economy is treated as a small open economy. The results of the study are as follows: (i) The state of foreign economy has significantly affected domestic inflation and real GDP gap in the last few years. (ii) A sudden depreciation of domestic currency no longer supports domestic economic growth and its impact on domestic price level has relaxed. (iii) The impact of monetary policy actions on domestic price has switched to be swift and significant in the last few years. (iv) The CBE does not regularly intervene in the FX market and no longer confines itself with a target for M2. (v) The CBE has been caring about price stability and real GDP growth, respectively. In addition, the CBE has managed monetary policy more independently in the last few years.

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Article provided by Bulgarian Academy of Sciences - Economic Research Institute in its journal Economic Studies.

Volume (Year): (2011)
Issue (Month): 4 ()
Pages: 186-209

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Handle: RePEc:bas:econst:y:2011:i:4:p:186-209
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  1. Zellner, Arnold & Palm, Franz, 1974. "Time series analysis and simultaneous equation econometric models," Journal of Econometrics, Elsevier, vol. 2(1), pages 17-54, May.
  2. Frederic S. Mishkin, 1995. "Symposium on the Monetary Transmission Mechanism," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 3-10, Fall.
  3. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," NBER Working Papers 5146, National Bureau of Economic Research, Inc.
  4. Rania A. Al-Mashat & Andreas Billmeier, 2007. "The Monetary Transmission Mechanism in Egypt," IMF Working Papers 07/285, International Monetary Fund.
  5. Mojon, Benoît & Peersman, Gert, 2001. "A VAR description of the effects of monetary policy in the individual countries of the euro area," Working Paper Series 0092, European Central Bank.
  6. Peersman, Gert & Smets, Frank, 2001. "The monetary transmission mechanism in the euro area: more evidence from VAR analysis," Working Paper Series 0091, European Central Bank.
  7. Kamar Bassem & Bakardzhieva Damyana, 2005. "Economic Trilemma and Exchange Rate Management in Egypt," Review of Middle East Economics and Finance, De Gruyter, vol. 3(2), pages 1-24, August.
  8. M S Mohanty & Philip Turner, 2008. "Monetary policy transmission in emerging market economies: what is new?," BIS Papers chapters, in: Bank for International Settlements (ed.), Transmission mechanisms for monetary policy in emerging market economies, volume 35, pages 1-59 Bank for International Settlements.
  9. John B. Taylor, 1995. "The monetary transmission mechanism: an empirical framework," Working Papers in Applied Economic Theory 95-07, Federal Reserve Bank of San Francisco.
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