Abstract:
This paper addresses the relationship between inflation and growth in Egypt 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; from this year onwards, lower and less volatile growth is associated with significantly lower inflation. It was found that the impact of inflation on GDP growth is not significantly different between the two periods. Testing for non-linear effects of inflation on growth in Egypt, it appears that 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. 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, it is proposed that the central bank targets an inflation rate in the 9–12 percent range, corresponding to the lower bound of the estimated threshold interval.
