Working Papers

Monetary Policy Response to Exchange Rate Movements: The Case of Egypt

Publication Number: ECESWP158-E

August, 2010

Author : Tarek Abdelfattah Moursi and Mai El Mossallamy

Type : Working Papers

The primary objective of this paper is twofold. First, it examines the design and conduct of monetary policy in Egypt. Second, it verifies whether “fear of floating” induces the Central Bank of Egypt to regularly resort to policy amendments as a means of smoothing exchange rate fluctuations. Consequently, the study provides an assessment of the credibility of the CBE commitment to floating the pound and evaluates the extent to which exchange rate movements are taken into consideration when formulating monetary policy. Both issues are addressed in the context of a dynamic stochastic general equilibrium (DSGE) model that simulates the performance of monetary policy in Egypt within a SOE setting characterized by a flexible exchange rate, perfect capital mobility and an inflation targeting mechanism described by a generic Taylor-type interest reaction function.