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

03-04-2007
Author(s): Aart Kraay
Publication Number: ECES-WP120-E

Abstract:

The Egyptian pound depreciated sharply between 2000 and 2005, declining by 26 percent in nominal trade-weighted terms. This paper investigates the effect of the large depreciation on household welfare operating through exchange rate-induced changes in consumer prices. To do so, the study estimates exchange rate pass-through regressions using disaggregated monthly consumer price indices to isolate the impact of the exchange rate changes on consumer prices. It then uses household-level data from the 2000 and 2005 Egyptian household surveys to quantify the welfare effects of these consumer price changes at the household level. The average welfare loss due to exchange rate-induced price increases was equivalent to 7.4 percent of initial expenditure. Stronger estimated exchange rate pass-through for food items implies that this effect disproportionately impacted poorer households.

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