On the Asymmetric and De-Anchored Impacts of Exchange Rate on Inflation Rate in Egypt: A Non-Linear MIDAS Evidence

This paper employs a mixed data sampling approach to analyse the potential impacts of daily exchange rate on monthly inflation rate. Our results indicate that the response of CPI inflation to changes in the NEER is asymmetric. While exchange rate depreciation results in a persistent increase in the inflation rate, the inflation reducing effect of the exchange rate appreciation is minimal and limited to small changes. Meanwhile, the information content of daily exchange rate for explaining inflation outcomes varies significantly over the month. We, therefore, estimate a mixed-frequency model that accounts for the intra-month dynamics of exchange rate to predict next-month inflation on a daily basis. Our estimated indicator of daily inflation reveals that inflation expectations have recently showed signs of de-anchoring. Over 2020, expectations were more responsive to forecast revisions, actual inflation, and cross-expectations spill-overs.