Document Type

Article

Publication Date

2008

Abstract

The objective of this paper is to analyze the relationship between exchange rate changes and output in the Egyptian economy. This is the first such study that we know of for Egypt. Employing a Vector Autoregression model, the paper conducts the study using annual data for Egypt over the period 1982-2004. The results of the study indicate that devaluations have an initial contractionary effect on output in Egypt. This contractionary effect lasts for a period of as long as four years before the expected positive effect of the devaluation starts to materialize. Moreover, the study clarifies that real exchange rate variations explain a considerable part of real output changes in Egypt. This suggests that it could be somewhat risky for the government to largely allow market forces to determine the value of the Egyptian pound in the current period. Intervention may still be needed to correct undesirable movements in the exchange rate. This could continue at least until the economy makes a full transition to the new flexible exchange rate system in which monetary policy assumes a bigger role in stabilizing the economy.

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