Abstract:
The Central Bank of Egypt (CBE) has taken serious steps to develop its monetary policy framework with the intention to adopt inflation targeting (IT) over the medium term. Against this background, this paper examines the inflation dynamics in Egypt by estimating monetary models. The empirical findings suggest that the money gap model based on domestic liquidity outperforms other model specifications and better captures the inflation dynamics. Moreover, in light of the banking reform program undertaken by the CBE in 2004 and taking into account the experiences of other emerging market inflation targeters, the paper assesses and contrasts Egypt’s preparedness for IT. From the analysis, it appears that there is nothing inherent in Egypt’s economy that would disqualify it from adopting an IT framework, notwithstanding a few areas of improvement such as consolidating the fiscal position and improving the macroeconomic database.
