Dynamic interaction between macroeconomic imbalances: The case of Egypt

Document Type


Publication Date

Fall 2018


This study examines the dynamic interaction between three macroeconomic imbalances (current account, output gap, and exchange rate misalignment) affecting Egypt. The interaction between these imbalances is critical given their interdependence. Vector Auto Regression (VAR) analysis is employed over the period 1990 to 2015 and interpreted through impulse response functions and variance decomposition. The Granger causality test is also applied. The main findings are that positive shocks in real exchange rate misalignment result in a deficit in the current account and there is a causal relationship running from real exchange rate misalignment and the output gap to the current account. Policy recommendations emphasize the vital need to increase productivity and domestic industrial output to reduce the output gap and improve the situation of the current account. Accordingly, this will help, in the context of the current liberalised Egyptian exchange rate, to deliver more positive effects for the Egyptian economy.