IDEAS home Printed from https://ideas.repec.org/p/erg/wpaper/869.html
   My bibliography  Save this paper

Exchange Rates and Interest Rates: An Empirical Investigation of International Fisher Effect Theory The Case of Egypt (2003-2012)

Author

Listed:
  • Abla El Khawaga
  • Mona Esam
  • Rasha Hammam

    (Cairo University)

Abstract

This paper examines the validity of the International Fisher Effect (IFE) theory for the Egyptian economy. Two case studies are investigated: Egypt vs. USA and Egypt vs. Germany during the period (2003-2012). The long run relationship between nominal changes in exchange rate and nominal interest rate differential for each of the two case studies is examined using the Autoregressive Distributed Lag bounds test approach to co-integration and error correction model. The short run relationship is examined through impulse response function and variance decomposition. In addition, the Granger causality test is employed to identify the direction of the relationship. The empirical findings revealed partial significance of IFE in the case of Egyptian pound vs. US dollars, while no sign of IFE was detected in the case of Egyptian pound vs. Euro currency. The irrelevance of IFE could be attributed to the irrelevance of Purchasing Power Parity theory in Egypt. This is in addition to Egypt’s limited financial integration with international financial markets.

Suggested Citation

  • Abla El Khawaga & Mona Esam & Rasha Hammam, 2014. "Exchange Rates and Interest Rates: An Empirical Investigation of International Fisher Effect Theory The Case of Egypt (2003-2012)," Working Papers 869, Economic Research Forum, revised Nov 2014.
    • Handle: RePEc:erg:wpaper:869
    as

    Download full text from publisher

    File URL: http://erf.org.eg/wp-content/uploads/2015/12/869.pdf
    Download Restriction: no
    File URL: http://bit.ly/2mveDyK
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Chinn, Menzie David & Ito, Hiro, 2005. "What Matters for Financial Development? Capital Controls, Institutions, and Interactions," Santa Cruz Department of Economics, Working Paper Series qt5pv1j341, Department of Economics, UC Santa Cruz.
    2. Marashdeh, Hazem, 2005. "Stock Market Integration in the MENA Region: An Application of the ARDL Bounds Testing Approach," Economics Working Papers wp05-27, School of Economics, University of Wollongong, NSW, Australia.
    3. repec:bla:scandj:v:78:y:1976:i:2:p:200-224 is not listed on IDEAS
    4. Imed Drine & Christophe Rault, 2008. "Purchasing Power Parity For Developing And Developed Countries. What Can We Learn From Non‐Stationary Panel Data Models?," Journal of Economic Surveys, Wiley Blackwell, vol. 22(4), pages 752-773, September.
    5. Mehrara, Mohsen, 2007. "Energy consumption and economic growth: The case of oil exporting countries," Energy Policy, Elsevier, vol. 35(5), pages 2939-2945, May.
    6. Hoda Selim, 2010. "Has Egypt’s Monetary Policy Changed after The Float?," Working Papers 543, Economic Research Forum, revised 09 Jan 2010.
    7. Chinn, Menzie David & Ito, Hiro, 2005. "What Matters for Financial Development? Capital Controls, Institutions, and Interactions," Santa Cruz Center for International Economics, Working Paper Series qt5pv1j341, Center for International Economics, UC Santa Cruz.
    8. Ross Levine, 1997. "Financial Development and Economic Growth: Views and Agenda," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 688-726, June.
    9. Nidal Rashid Sabri & Marga Peeters & Diama K. Abulaban, 2012. "The impact of exchange rate volatility on trade integration among North and South Mediterranean countries," International Journal of Business and Globalisation, Inderscience Enterprises Ltd, vol. 9(2), pages 107-121.
    10. Frankel, Jeffrey A, 1979. "On the Mark: A Theory of Floating Exchange Rates Based on Real Interest Differentials," American Economic Review, American Economic Association, vol. 69(4), pages 610-622, September.
    11. Ayhan Kose, M. & Prasad, Eswar S. & Taylor, Ashley D., 2011. "Thresholds in the process of international financial integration," Journal of International Money and Finance, Elsevier, vol. 30(1), pages 147-179, February.
    12. M. Hashem Pesaran & Yongcheol Shin & Richard J. Smith, 2001. "Bounds testing approaches to the analysis of level relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 289-326.
    13. Thomas Lagoarde-Segot & Brian M. Lucey, 2007. "Capital Market Integration in the Middle East and North Africa," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 43(3), pages 34-57, June.
    14. Chinn, Menzie D. & Ito, Hiro, 2006. "What matters for financial development? Capital controls, institutions, and interactions," Journal of Development Economics, Elsevier, vol. 81(1), pages 163-192, October.
    15. Granger, C. W. J., 1988. "Some recent development in a concept of causality," Journal of Econometrics, Elsevier, vol. 39(1-2), pages 199-211.
    16. Masih, Abul M. M. & Masih, Rumi, 1996. "Energy consumption, real income and temporal causality: results from a multi-country study based on cointegration and error-correction modelling techniques," Energy Economics, Elsevier, vol. 18(3), pages 165-183, July.
    17. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-1176, December.
    18. repec:bla:jfinan:v:43:y:1988:i:4:p:933-48 is not listed on IDEAS
    19. Hatice Pehlivan Jenkıns & Salih Turan Katırcıoglu, 2010. "The bounds test approach for cointegration and causality between financial development, international trade and economic growth: the case of Cyprus," Applied Economics, Taylor & Francis Journals, vol. 42(13), pages 1699-1707.
    20. Bahmani-Oskooee, Mohsen & Tankui, Altin, 2008. "The black market exchange rate vs. the official rate in testing PPP: Which rate fosters the adjustment process?," Economics Letters, Elsevier, vol. 99(1), pages 40-43, April.
    21. Hoffmann, Mathias & MacDonald, Ronald, 2009. "Real exchange rates and real interest rate differentials: A present value interpretation," European Economic Review, Elsevier, vol. 53(8), pages 952-970, November.
    22. Meese, R. & Rogoff, K., 1988. "Was It Real? The Exchange Rate-Interest Differential Ralation Over The Modern Floating-Rate Period," Working papers 368, Wisconsin Madison - Social Systems.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Sulaiman, Saidu & Masih, Mansur, 2017. "Is liberalizing finance the game in town for Nigeria ?," MPRA Paper 95569, University Library of Munich, Germany.
    2. Kevin Gallagher, 2012. "The Myth of Financial Protectionism: The New (and old) Economics of Capital Controls," Working Papers wp278, Political Economy Research Institute, University of Massachusetts at Amherst.
    3. Charles O. Manasseh & Timothy E. Mathew & Jonathan E. Ogbuabor, 2017. "Investigating the Nexus between Institutional Quality and Stock Market Development in Nigeria: An Autoregressive Distributed Lag (ARDL) Approach," African Development Review, African Development Bank, vol. 29(2), pages 272-292, June.
    4. Esin Cakan, 2018. "Impact of Financial and Trade Openness on Financial Development in Emerging Market Economies: The Case of Turkey," American Journal of Economics and Business Administration, Science Publications, vol. 9(4), pages 71-80, March.
    5. Muhsin KAR & Saban NAZLIOGLU & Huseyin AGIR, 2014. "Trade Openness, Financial Development, and Economic Growth in Turkey: Linear and Nonlinear Causality Analysis," Journal of BRSA Banking and Financial Markets, Banking Regulation and Supervision Agency, vol. 8(1), pages 63-86.
    6. Samia Nasreen & Sofia Anwar, 2020. "Financial Stability And The Role Of Economic And Financial Integration In South Asia: Evidence From Time-Series Data," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 65(02), pages 303-333, March.
    7. Samia Nasreen & Sofia Anwar, 2017. "Financial Stability And The Role Of Economic And Financial Integration In South Asia: Evidence From Time-Series Data," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 65(02), pages 303-333, March.
    8. Onur ÖZDEMİR, 2020. "Revisiting the Finance-Growth Nexus in Turkey: Bayer-Hanck Combined Cointegration Approach over the 1970-2016 Period," Sosyoekonomi Journal, Sosyoekonomi Society, issue 28(44).
    9. Juhro, Solikin M. & Narayan, Paresh Kumar & Iyke, Bernard Njindan & Trisnanto, Budi, 2020. "Is there a role for Islamic finance and R&D in endogenous growth models in the case of Indonesia?," Pacific-Basin Finance Journal, Elsevier, vol. 62(C).
    10. Chletsos, Michael & Sintos, Andreas, 2024. "Political stability and financial development: An empirical investigation," The Quarterly Review of Economics and Finance, Elsevier, vol. 94(C), pages 252-266.
    11. Tongurai, Jittima & Vithessonthi, Chaiporn, 2018. "The impact of the banking sector on economic structure and growth," International Review of Financial Analysis, Elsevier, vol. 56(C), pages 193-207.
    12. Grier, Kevin & Grier, Robin, 2007. "Only income diverges: A neoclassical anomaly," Journal of Development Economics, Elsevier, vol. 84(1), pages 25-45, September.
    13. Hauner, David, 2008. "Credit to government and banking sector performance," Journal of Banking & Finance, Elsevier, vol. 32(8), pages 1499-1507, August.
    14. Evans, Olaniyi, 2020. "Fiscal Discipline, Financial Development & Economic Growth in Nigeria," MPRA Paper 99242, University Library of Munich, Germany.
    15. Navaz Naghavi & Muhammad Shujaat Mubarik & Devinder Kaur, 2018. "Financial Liberalization And Stock Market Efficiency: Measuring The Threshold Effects Of Governance," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 13(04), pages 1-24, December.
    16. Jean-Pierre Allegret & Sana Azzabi, 2014. "Intégration financière internationale et croissance économique dans les pays émergents et en développement : le canal du développement financier," Revue d’économie du développement, De Boeck Université, vol. 22(3), pages 27-68.
    17. Ng, Adam & Dewandaru, Ginanjar & Ibrahim, Mansor H., 2015. "Property rights and the stock market-growth nexus," The North American Journal of Economics and Finance, Elsevier, vol. 32(C), pages 48-63.
    18. Khee Giap Tan & Sasidaran Gopalan & Phuong Anh Nguyen Le, 2017. "Financial Deepening and Economic Growth in Transition Economies of Southeast Asia: A Geweke Causality Analysis," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 20(03), pages 1-25, September.
    19. Vinokurov, Evgeny, 2017. "Regional financial integration in ASEAN in the comparative perspective," MPRA Paper 83022, University Library of Munich, Germany.
    20. World Bank Group, "undated". "Africa's Pulse, No. 18, October 2018," World Bank Publications - Reports 30455, The World Bank Group.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:erg:wpaper:869. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sherine Ghoneim (email available below). General contact details of provider: https://edirc.repec.org/data/erfaceg.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.