Macroeconomic Policies in Egypt An Interpretation of the Past and Options for the Future

Abstract:
This paper describes the recent evolution of macroeconomic policies in Egypt and derives a simple model (within an IS-LM framework) showing that, until the mid 1990s, the presence of liability dollarization and high passthrough from exchange rate to prices may have limited Egypt’s ability to conduct an independent monetary policy. However, the paper shows that conditions have changed and that there is now room for a more flexible exchange rate and that, in the light of Egypt’s limited ability to conduct counter cyclical fiscal policies, an independent monetary policy is necessary. The paper concludes by describing monetary and fiscal policy reforms that would improve Egypt’s macroeconomic management. On the monetary policy side, the paper suggests that Egypt should slowly move towards an inflation- targeting framework. On the fiscal policy side, the paper suggests that Egypt should adopt budget institutions that would allow eliminating its structural deficits and building a reputation for fiscal prudence.