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

Summary/Abstract: 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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