Mean Reversion of long run inflation in Egypt | ||||
| المجلة العلمية لکلية الدراسات الإقتصادية و العلوم السياسية | ||||
| Article 7, Volume 2, Issue 3, January 2017, Page 1-32 PDF (796.34 K) | ||||
| Document Type: المقالة الأصلية | ||||
| DOI: 10.21608/esalexu.2017.110232 | ||||
 View on SCiNiTO | ||||
| Author | ||||
Ù…Øمد سيد عابد مخيمر 
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| أستاذ الاقتصاد المساعد - کلية الدراسات الاقتصادية والعلوم السياسية - جامعة الإسکندرية | ||||
| Abstract | ||||
| Egyptian economy has witnessed unstable record of annual inflation rates over the last four decades. In the early 1970s inflation rate was at low level Shifted to a moderate level after the first oil-prices shock to the mid-1980s. Inflation took a faster track and averaged about 19% annually during second half of the 1980s to the early 1990s. After the successful implementation of the stabilization program with the International Monetary Fund (IMF) and the World Bank (WB) during 1992-1997, inflation decreased to a single digit about 4%. The abandonment of using foreign exchange rate as a nominal anchor and several devaluations in the early 2000s inflation rate increased again to around 11%. In 2005, Central Bank of Egypt (CBE) announced his intention to implement a full-fledged inflation-targeting policy once the fundamental prerequisites are met. In the aftermath of the revolution in 2011, inflation increased again progressively. In November 2016, Egyptian government reached an agreement with the IMF according to which it has access to billion 12$ of Extended Fund Facility over the next three years. This program entailed very restrictive monetary and fiscal policy to reduce the budget deficit as percentage of GDP and to put domestic debt on a sustainable track. Drastic measures prescribed by the IMF’ staff such as floatation of the Egyptian pound against the U.S. dollar, replacing the sales tax with the value-added tax, raising the Energy prices reducing the government subsidy to food and basic utilities. All these measures and others pushed inflation rate in Egypt to unprecedented level of more than 30% in the last quarter of 2016. The purpose of this study is to examine the mean reversion of inflation rate in Egypt over the last five decades by using stationarity tests that take into consideration the existence of multiple structural breaks. Based on the results of the mean-reverting investigation, the study will analyze its implications for the inflation-targeting policy proposed by the CBE in the mid-2000s. To enhance the performance of inflation-targeting policy with respect to inflation-forecasting accuracy, the study will estimate a nonlinear model to try to capture the dynamics of inflation rate in Egypt using monthly data during 1974:M1-2016:M12. Monthly data of inflation rate in Egypt exhibits clear volatility compared with annual data; this kind of instability can be better explained using time-varying conditional variance models. Nonlinear models such as Smooth Transition Autoregressive (STAR) which allows for regime switching could be suitable to explain such behavior. The paper is organized as follows. The first part presents a brief literature review of previous studies concerning inflation mean reverting. The second part will give some stylized facts about inflation rates in Egypt over the period 1974M1-2016M12. In the third provides information about data and methodology. Testing for non-stationarity and estimating a non-linear STAR model will be given in the third part. The fourth part provides the specification of a univariate nonlinear STAR model to explain inflation behavior in Egypt. The fifth part will analyze the empirical results of estimation of the STAR model. The final part will give the conclusion and policy implications of the study. | ||||
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