Working Papers

The Welfare Effects of a Large Depreciation: The Case of Egypt 2000-2005

Publication Number: ECESWP120-E

April, 2007

Author : Aart Kraay

Type : Working Papers

Between 2000 and 2005 Egypt experienced a large nominal depreciation of the Egyptian pound, much of it concentrated around a sharp decline in early 2003. The objective of this paper is to assess the welfare implications of the large changes in consumer prices that accompanied this movement in the exchange rate. To address this issue I first isolate the component of observed price changes during this period that are due to the depreciation. I do this by estimating disaggregated exchange rate pass-through regressions, using monthly consumer price index (CPI) data over the period July 2000 through June 2005, for 8 regions in Egypt, disaggregated into 20 different goods and services.1 The fitted values from these regressions provide estimates of the effect of the depreciation on 160 different price indices. Disaggregation of exchange rate pass-through to this level is important, as there is considerable heterogeneity across commodities in the response of domestic consumer prices to the exchange rate. In particular, I find that on average, exchange rate pass-through was greater for food items than for non-food items, and varied considerably even within food items. Regional variation in pass-through is also present, but is not as large as across consumption items.