Working Papers

Inflation and Growth in Egypt: Is There a Threshold Effect?

Publication Number: ECESWP135-E

June, 2008

Author : Hanaa Kheir-El-Din and Hala Abou-Ali

Type : Working Papers

This empirical study addresses the relationship between inflation and growth in Egypt, based on annual data for the last quarter century. Two distinct sub-periods are observed: somewhat higher and more volatile GDP growth rate is associated with higher inflation prior to 1990/91 while lower and less volatile growth is associated with significantly lower inflation starting 1990/91. Testing for differentiated responses of GDP growth to inflation during the two subperiods, the estimated coefficients are significant and negative for both periods, but do not appear to be significantly different, implying that the impact of inflation on GDP growth is not significantly different. Testing for causality as well as for non-linear effects of inflation on growth in Egypt, it appears that inflation causes growth consistently with a one-year lag. It further appears that, controlling for various growth determinants, inflation at 15 percent and higher has negative effects on growth. However, this estimated threshold has been found to vary within a broad confidence interval with a lower bound ranging between 9–12 percent. Considering that low inflation could harm growth whereas high inflationary expectations would run the risk of inflation going out of control, adversely affecting economic growth, the study proposes that the central bank target an inflation rate in the 9–12 percent range.