Sources of real exchange rate fluctuations in Egypt

Alabdulwahab, Sami; Abou-Zaid, Ahmed S.
A icle
Sou ces o eal exchange a e luc ua ions in Egyp
Re iew o Economics and Poli ical Science (REPS)
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Sugges ed Ci a ion: Alabdulwahab, Sami; Abou-Zaid, Ahmed S. (2024) : Sou ces o eal exchange a e
luc ua ions in Egyp , Re iew o Economics and Poli ical Science (REPS), ISSN 2631-3561, Eme ald,
Bingley, Vol. 9, Iss. 1, pp. 40-57,
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Sou ces o eal exchange a e
luc ua ions in Egyp
Sami Zaki Alabdulwahab
Depa men o Economics, King Faisal Uni e si y, Al-Ahsa, Saudi A abia, and
Ahmed Sab y Abou-Zaid
Depa men o Economics, Eas e n Illinois Uni e si y, Cha les on, Illinois, USA and
Depa men o Economics, Suez Uni e si y, Suez, Egyp
Abs ac
Pu pose –This pape aims o empi ically in es iga e he sou ces o eal exchange a e luc ua ions in Egyp
using s uc u al ec o au o eg ession (SVAR). The da a co e s he pe iod be ween 1980 and 2016, whe e
exchange egime has been changed mo e han once.
Design/me hodology/app oach –This pape in es iga es he sou ce o eal exchange a e luc ua ions o
he pe iod be ween 1980 and 2016 using he SVAR me hod. The SVAR me hod will inco po a e eal g oss
domes ic p oduc (GDP), eal e ec i e exchange a e (REER) and p ice le el in a mul idimensional equa ions
sys em. Howe e , impulse esponse unc ion (IRF) and e o a iance decomposi ions (EVDC) will be gene a ed
by he sys em o ha e a beha io al insigh o eal exchange a e in esponse o economic shocks.
Findings –The IRF and EVDC esul s indica e a signi ican impac o demand shocks o e he eal exchange
a e ela i e o supply shocks and mone a y shocks in he pe iod be ween 1980 and 2016. On he o he hand,
mone a y shocks will ha e a negligible e ec on he eal exchange a e in he sho un and con e ging o i s
p e ious le el in he co e ing pe iod o he s udy.
O iginali y/ alue –In he bes o he au ho s’knowledge, he opic o he sou ce o he eal exchange a e
luc ua ions in Egyp has no been discussed in a wide ange due o he lack o ime se ies da a. Howe e , his
s udy p o ides cons uc ed da a o REER o Egyp wi h he published me hod in he In e na ional Mone a y
Fund (IMF). Fu he mo e, he s udy in ol es heo e ical and econome ic modeling o ensu e he eliabili y o
he economic esul s.
Keywo ds Exchange a e, Egyp , SVAR, Demand shocks, Supply shocks
Pape ype Resea ch pape
1. In oduc ion
Since he beginning o he new millennium, Egyp has s a ed o adop a ious measu es o
e o m i s exchange a e policy o educe luc ua ion and ola ili y in he eal alue o he
Egyp ian pound. By ea ly 2003, he Egyp ian cen al bank announced a shi om a ixed
exchange a e egime o a managed loa egime. Howe e , his s ep was no enough o
achie e signi ican imp o emen in he exchange a e ma ke . The o eign ese es con inued
o sh ink, he uno icial a e con inued o di e ge signi ican ly om he o icial a e, he
in la ion a e con inued o inc ease o double digi s, he ade de ici con inued o de e io a e,
and he o eign cu ency con inued o be in sho supply in he domes ic ma ke . By
No embe 2016, he Egyp ian cen al bank announced in an o icial s a emen ha i would
mo e o a “Libe alized exchange a e in o de o c ea e an en i onmen o a eliable and
sus ainable supply o o eign cu ency.”As a esul , he Egyp ian pound los mo e han 80%
o i s alue, and in la ion sky ocke ed o mo e han 25%. Thus, his pape is in e es ed in
REPS
9,1
40
© Sami Zaki Alabdulwahab and Ahmed Sab y Abou-Zaid. Published in Re iew o Economics and
Poli ical Science. Published by Eme ald Publishing Limi ed. This a icle is published unde he C ea i e
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h ps://www.eme ald.com/insigh /2631-3561.h m
Recei ed 31 May 2022
Re ised 4 Decembe 2022
7 Ma ch 2023
Accep ed 16 June 2023
Re iew o Economics and Poli ical
Science
Vol. 9 No. 1, 2024
pp. 40-57
Eme ald Publishing Limi ed
e-ISSN: 2631-3561
p-ISSN: 2356-9980
DOI 10.1108/REPS-05-2022-0032
s udying he beha io o he eal exchange a e in Egyp and he sou ces o i s luc ua ion and
ola ili y o e he las hi y yea s. Two majo explana ions ha e p o ided he causes o eal
exchange a e ola ili y. The i s model, known as he disequilib ium app oach, ocuses on
he ole o nominal shocks ( inancial ma ke dis u bances) in causing ansi o y mo emen s
in exchange a es. The equilib ium o eal economy iew, which is he second model, sugges s
ha eal a es adjus in esponse o changes in eal mac oeconomic a iables. Acco ding o
his iew, pe manen eal shocks a e esponsible o luc ua ions in bo h eal and nominal
a es. To de e mine he signi icance o pe manen and momen a y shocks on exchange a es,
i is c ucial o cons uc an empi ical model, as emphasized by Fa an and Pee sman (2005).
This s udy examines he e ec s o h ee dis inc shocks, speci ically, supply shocks, demand
shocks and mone a y shocks, on luc ua ions in he eal exchange a e. The esul p o ides an
explana ion o he beha io o eal exchange a e luc ua ions o he Egyp ian Pound wi hin
a amewo k o ade e ec ha has been indi ec ly imposed ia eal e ec i e exchange a es
(REERs). While using eal a e is sui able o ack exchange a e luc ua ions, he use o he
e ec i e exchange a e is ad ancing he analysis o gain b oad insigh in o he eali y o he
sou ces o eal exchange a e luc ua ions. This is a majo con ibu ion o his pape
compa ed o he mos s udies ha analyze Egyp ian Pound eal exchange a e luc ua ions.
The es o he s udy is di ided as ollows: Sec ion 2 p o ides an o e iew o exchange
a e policies and mo emen s in Egyp o he las 30 yea s, Sec ion 3 p esen s a li e a u e
e iew and he empi ical model is p esen ed in Sec ion 4, he esul s and discussion a e
p o ided in Sec ion 5 and Sec ion 6 concludes he indings o he s udy.
2. B ie o e iew o he exchange a e policy and mo emen s in Egyp
In 1991, Egyp ied i s cu ency o he US$ bu discon inued his policy in he middle o 2000.
The coun y aced moun ing p essu e on he alue o i s cu ency since 1998, igge ed by capi al
ligh a e he Asian inancial c isis and e o is a acks a home and ab oad, which hu he
ou ism indus y. Addi ionally, he US$’s app ecia ion agains he eu o and yen con ibu ed o
Egyp ’s declining compe i i eness. A i s , Egyp ied o manage hese challenges by
in e ening in he o eign exchange ma ke and implemen ing igh e c edi policies, bu hese
measu es ailed o s em he decline in o icial ese es o o spu economic g ow h. In mid-2000,
Egyp allowed i s cu ency o loa wi hin a band, which did no alle ia e exchange a e p essu es.
Following he Sep embe 11 a acks, hese p essu es inc eased u he , leading o a mo e han
35% dep ecia ion o he pound agains he dolla om mid-2000 o ea ly 2003. Consequen ly,
o eigncu encybecamesca cein heo icialma ke and a pa allel exchange ma ke eme ged.
Recen ly, Egyp shi ed o a loa ing exchange a e egime, which esul ed in a 20% dep ecia ion
o he pound, bu imp o ed he a ailabili y o o eign exchange in he o icial ma ke .
3. Re iew o li e a u e
Be o e ac o s a ec ing he eal exchange a e became opical issues in he li e a u e, he main
channel by which eal exchange a es luc ua e was widely asc ibed o changes in mone a y
ac o s. While some s ill hold a consensus iew on i s po ency o ola ili y, i is g ossly
disc edi ed among o he s. Ca alho e al. (2019) s a e ha pe sis en dep ecia ion o he eal
exchange a e esul s om mone a y shocks. P io , Gold ajn and Gup a (2003) and Adeoye
and Olu emi (2014) asse ed ha exchange a e luc ua ions a e signi ican ly a ec ed by
mone a y policy a iables. While Gold ajn and Baig (1999) a gued ha igh mone a y
policies assis c isis-ba e ed coun ies’cu encies in egaining hei s eng h, Adeoye and
Olu emi (2014) admi ha mone a y ins umen s a e ine ec i e in s abilizing exchange a e
mo emen in Nige ia. Hilde (2008), howe e , p oposed ha al hough he e was sho - e m
o e shoo in he app ecia ion om mone a y policy shocks, he eal exchange a e s eadily
g a i a ed back o i s long- un equilib ium.
Exchange a e
luc ua ions in
Egyp
41
As no ed abo e, schola ship on mone a y ac o s as he singula de e minan s o eal
exchange luc ua ion has los g ound wi hin he in ellec ual space o new open economy
mac oeconomics, especially wi h he ecen o e whelming empi ical e idence om
de eloping na ions. In ecen decades, some schola s (who ha e begun o esea ch new
open economy mac oeconomics) ha e claimed ha he Do nbusch (1976)—upon which abo e
s udies we e de eloped—building block o exchange a e luc ua ion, a gued o be la gely
a ibu ed o mone a y policy shocks, has long been disman led by subs an i e esul s o he
e ec s o eal economic shocks, such as ade and inancial libe aliza ion, p oduc i i y
shocks, capi al low and go e nmen spending on ola ili y in he eal exchange a e. In
ea lie esea ch deba es, Obs eld and Rogo (1995) and Su he land (1996) s essed ha ade
and inancial libe aliza ion diminish shocks o he eal exchange a e mo emen . This deba e
encou aged a wide spec um o s udies o conside de eloping na ions as labo a o ies o
es ing hese eal ac o s on luc ua ions in he eal exchange a e.
Calde on (2004) a gued ha he inclusion o ade openness among o he mac oeconomic
undamen als allows o be e explana o y powe in p edic ing he luc ua ion in he eal
exchange a e. The empi ical esul o Mpo u (2016) is also consis en wi h his inding,
concluding ha ade openness a enua es he e ec s o ola ile undamen als on he eal
exchange a e. Con a y o he mains eam mone a y app oach, he s udy came ou wi h an
in luen ial epo ha eal ac o s such as ade openness ha e a sizable in luence on eal
exchange a e mo emen . These esea ch pape s d aw hea ily on and co obo a e he
p ominen wo k o Hau (2002) in ha he e is an in e se ela ion be ween ade openness and
eal exchange a e ola ili y. Fo Hau, i is incon o e ible o a gue ha ade openness and he
eal exchange a e a e in e sely linked on bo h heo e ical and empi ical g ounds. In his pas
pape , Hau (2000) and la e Obs eld and Rogo (2000) opined ha an in eg a ed and ade
libe alized economy is expec ed o ha e less luc ua ion in i s exchange a e. I is belie ed ha
coun ies wi h open economies end o be aced wi h mo e p ice le el lexibili y han when hey
close hei bo de s o he wo ld.In ui i ely, he au ho s a gued ha p ice adjus men in an open
economy will be mo e equen and easily ansmi ed be ween bo de s and could be capable o
assuaging hewide luc ua ion in he eal exchange a e ha esul s om shocks. This e idence
is no di e en om ha asse ed by Bleaney (2008),Se giu (2007),Calde on and Kubo a (2009).
S ill on eal ac o s, ano he s and o empi ical esea ch pape s dwells hea ily on he
ela i e p oduc i i y di e en ial. E en hough he p oduc i i y e ec holds ue, a ew
s udies coun e he Balassa (1964) and Samuelson (1964) e ec on he ola ili y mo emen o
he eal exchange a e. This model showed ea lie ha he eal exchange mo emen is
signi ican ly de e mined by he p oduc i i y g ow h di e en ial be ween non- adable and
adable sec o s ac oss coun ies. Loko and Tuladha (2005) con adic he B-S model and
o e se e al o he ac o s causing eal exchange a e dep ecia ion in he Yugosla ia Republic
o Macedonia. The au ho s belie e he coun y su e s om echnological g ow h, which only
allows he p oduc ion o low-quali y goods, leading o lowe p ices. I is hen claimed ha he
eal exchange a e mo emen is ela ed o a p olonged ansi ion p ocess, which esul s om
he con inual ela i e decline in he quali y o i s adable e e ence commodi y baske
is-
a- is i s ading coun ies. Ano he ela ed s udy (Ch is oph, 2004) on he accession
coun ies in he Eu opean Union aul s s udies ha ea lie a ibu ed cu ency app ecia ion o
only he Balassa-Samuelson p oduc i i y e ec and highligh s ha e idence shows ha eal
exchange a e app ecia ion is a esponse o he p oduc i i y e ec s ha esul om he
in es men demand condui . While he e has been c i icism o his ime-hono ed e ec , one
in luen ial wo k main ained ha he new e sion o he B-S e ec , he Ha od-Balassa-
Samuelson e ec , can only be subs an ia ed i we allow o a ew changes. Tha is,
“ he posi i e e ec on he eal exchange a e wo ks h ough he adable-based eal exchange
a e and weak ela ion o he ela i e p ice di e en ial be ween aded and non aded
sec o s,”as s a ed by Jaewoo and Man-Keung (2003).
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This se o s udies conside ing inancial libe a ion bu igno ing mac oeconomic
undamen als is no ee o c i icism. A la ge body o li e a u e claims ha inancial
openness has a nega i e side, whe he on a con inen al o global scale. The wo majo
inancial c isis expe iences o he pas wo decades ell us ha economies wi h conside able
inancial exposu e and a small o eign ese e base su e mo e exchange a e luc ua ions in
he ace o a c isis. F a zsche (2009) disclaims he widesp ead consensus o he specula ed
dep ecia ion o he US$ in he e en o a global inancial c isis bu shows ha he e e se is
he case. As i u ns ou , mos coun ies wi h high inancial deb s wi h he Uni ed S a es and
un a o able cu en accoun s anding we e he ones aced wi h la ge dep ecia ion in hei
cu encies. As i was impe a i e o he economy o add ess he inancial c isis, i was
necessa y o epa ia e o eign in es men s om hese coun ies, which pu p essu e on US$
and caused i s app ecia ion. Since mos de eloping coun ies lack signi ican ese es o
bu e hea y capi al ligh , in ui i ely, his leads o cu ency dep ecia ion. While he pape
admi s ha global inancial libe aliza ion is good, c isis may c ea e ha d imes o policy-
make s in coun ies ha do no ha e sound mac oeconomic undamen als o cushion he
e ec o ulne abili y in he e en o capi al epa ia ion.
Kohle (2010), in compa ing h ee inancial c ises (Asian C isis, Russian Deb De aul and
Global Financial C isis), as in p e ious pape s, opined ha he sea ch o sa e ha en
cu encies and he impac o in e es a e di e en ials led o he dep ecia ion o he cu encies
o he coun ies ha we e no a he cen e o he inancial chaos in 2008. Howe e , he au ho
did ind ha hese coun ies, cu ency dep ecia ion began o e e se a e he unce ain ies
we e pe cei ed o be limi ed. As highligh ed abo e, he ou come o inancial epa ia ion,
s emming om he high demand o liquidi y by USA in es o s, de e io a es he cu encies o
he de eloping coun ies whe e hose in es men s we e domiciled. A p io s udy conduc ed
by Ma k (2009) exhibi s a di e en c isis impac in con as o he 2008 global inancial
u moil o igina ing om he Uni ed S a es. The au ho a gues ha inancial libe aliza ion in
he egion be o e he Asian C isis made a ec ed coun ies (especially Thailand) ulne able o
he unp eceden ed u na ound o ini ial in e na ional capi al lows. He blames he c isis on
unchecked openness, which exposed he egion o he inancial specula i e a ack and as he
p edicamen ose du ing he pe iod, he need o se ice in e na ional deb s esul ed in high
capi al ou low, leading o he domes ic cu ency dep ecia ing agains ha d cu encies.
Ins inc i ely, hese wo inancial c ises a e he same in e ms o he obse ed hea y
luc ua ions in eal exchange a es du ing he inancial quagmi e, bu hey di e in ha bo h
e en s led o p o ound dep ecia ion in he de eloping na ion cu encies ha we e connec ed
o he c ises.
A la ge body o li e a u e exis s on he impac o Du ch disease on he eal exchange a e
ola ili y o oil-expo ing de eloping coun ies. E en hough he e ha e been dispa a e
opinions on he impac o he esou ce cu se on he eal exchange a e in hese coun ies, he
discou se on his impac is clea . Tha is, hese oil expo ing na ions expe ience ola ili y a
some poin s in he span o he economic cycle esul ing om changes in wo ld oil p ices. In he
wo k o T e ino (2011), he app ecia ion o he eal exchange a e is consis en wi h he
esou ce cu se. T e ino examined hese coun ies (all o which a e om he A ican con inen )
and sugges ed an economic amewo k h ough which Du ch Disease ansmi s in o cu ency
app ecia ion. He concludes ha he highe wages p e ailing in he esou ce-based sec o soon
ans e ed o he gene al inc ease in domes ic p ices ela i e o o eign p ices. This
e en ually led o a highe p ice o domes ic cu ency.
In o he opical s udies in he li e a u e, he impac o emi ances in domes ic economies
has been widely associa ed wi h he simila in luence oil disco e y on he cu ency o oil
expo ing de eloping coun ies. I s impac on he eal exchange a e has, howe e , a ac ed
di e en opinions om schola s in he li e a u e. Acos a e al. (2009) submi ha he a gumen
ha emi ances pose he same haza d as he oil ype o Du ch Disease is un ealis ic and
Exchange a e
luc ua ions in
Egyp
43

p o ides li le e idence o he changes in eal exchange a es. The s udy demons a es ha
he weakness o his Du ch Disease was a esul o se e al associa ed di icul ies.
The homogenei y o ac o s ha makes i easy o ealloca e among aded and non aded
sec o s causes he la ge emi ance in low om ab oad o be abso bed by aded goods
demand, which b ings abou a smalle change in he eal exchange a e. On ano he no e, he
coun e cyclical e ec o he emi ance in low on long- un changes in domes ic ou pu
unde mines any long- un eal exchange a es luc ua ion which is esul ing om such
emi ance eceip . The a gumen also holds ha less o unchanged in he long- un
equilib ium eal exchange a es may occu o any nonmone a y economy ha wholly
alloca es i s emi ance in low o aded goods. Howe e , in he mone a y economy, he
impac o a la ge emi ance in low may cause cu ency dep ecia ion. Ba e (2013) suppo s
his in e se ela ionship and con incingly s a es ha Jamaica has expe ienced a all in i s
cu ency is-
a- is o he s despi e la ge emi ance eceip in o he coun y.
Tuuli (2015) and Hassan and Holmes (2013) con adic his na u e o s udies ha condemn
he p esence o he Du ch Disease o m e ec in mos na ions ha enjoy emi ance in low.
Unlike hose on he o he end o he spec um, p e ious s udies ha e main ained ha he y
capi al in lows in he o m o emi ances pai wi h cu ency app ecia ion, esul ing in he
a i ion o na ions’ ade compe i i eness in he in e na ional ma ke s. Ano he con inuum o
s udies, such he in luen ial pape o Acos a e al. (2009), suppo s he claim o Du ch Disease
in hese ecipien na ions; howe e , he au ho s ind ha inasophis ica edand
well-de eloped inancial ma ke , he e is e idence o a e en ion o ade compe i i eness
in he mids o la ge emi ance in low. This ype o in low does no wo sen he le el o ade
compe i i eness in hese ecipien na ions.
E en hough hese wo di e gen s udies a y in hei submissions on Du ch Disease
p esence on na ions wi h la ge emi ances, as B ahim e al. (2018) would sugges , ce ain
ac o s may unde mine i s isks. The in luen ial wo k o Ba ajas e al. (2011) no es ac o s
such as ade and inancial openness, lexibili y in he ac o ma ke ha allows high ac o
mobili y among sec o s and emi ance eceip , which pe o ms a coun e cyclical unc ion.
Las , Kee e (2014) blames he luc ua ion in he exchange a e o luc ua ions in he c edibili y
o policy-make s, ins i u ional amewo ks and high exchange a e pass- h oughs in
coun ies wi h high emi ance in lows. The s udy con inces us ha in a dolla ized economy
ha main ains a s able supply o o eign cu ency, emi ances will a enua e exchange a e
luc ua ion, p o iding he same e ec as ade openness.
In a simila Egyp economy, Mo ales-Zumaque o (2006) analyzes he sou ce o eal
exchange a e luc ua ions in de eloping Eu opean coun ies mos ly Eas e n and Cen al o
Eu ope wi h di e en ou comes. The ela i e p ices o non aded goods ha e d i en he eal
exchange a e in managed exchange a e coun ies. Howe e , he a iance o he eal exchange
a e is uns able in he ad anced economy. Fu he mo e, eal shocks ha e a dominan e ec on
he eal exchange a e in he ansi ion economy. On he o he hand, Ape gis and Ka akis
(1996) used SVAR me hodology o examine sou ce eal exchange a e luc ua ions in G eece.
They ound ha supply shocks a e he main sou ce o luc ua ions in he eal exchange a e.
Myanma has changed i s exchange a e egime a di e en poin s o ime acco ding o
Kubo (2013). The change in he egime caused sha p luc ua ions in he eal exchange a e
ela i e o o he Sou h Asian coun ies’cu encies. Howe e , using he SVAR model o
analyze he sou ce o luc ua ions in he eal exchange a e, esul ing in pe sis en eal shocks,
mos ly d i es he luc ua ions.
In es iga ing h ee coun ies wi h simila economic s uc u es om di e en con inen s
c ea es a b oad capaci y o compa ison. D ine and Raul (2009) examine he sou ce o eal
exchange a e luc ua ions in Mo occo, Philippines and U uguay. They use SVAR o obse e
he impac s o ex e nal shocks, domes ic shocks, demand shocks and nominal shocks.
The esul s indica e ha eal shocks ha e d i en eal exchange a e luc ua ions mos ly in he
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h ee coun ies. Howe e , nominal shocks ha e a negligible impac on p ice excep in
Mo occo. This esul indica es ha mone a y policy is weak in con olling and p omo ing he
compe i i eness o he economy in he wo coun ies. On he o he hand, S ia (2006) analyzed
Tunisian eal exchange a e luc ua ions wi h he SVAR me hod. The s udy has ound ha
he eal exchange a e is mos ly de e mined by eal shocks in he sho un and ha supply
shocks ha e he lead in he long un. Howe e , eal shocks ha e a g ea e impac on ela i e
p ices, indica ing ha mone a y policy is powe less in p omo ing he compe i i eness o he
economy. Fu he mo e, Tokmakciogul and Ozcelebi (2020) es ima ed he Bayesian ec o
au o eg ession (BVAR) model as well as he ime- a ying SVAR model o assess he impac
o shadow sho a es on he easu y Eu o-Dolla a e and s ock e u ns. They ound ha
ola ili y in s ock e u ns and inancial bubbles would be minimized by shadow sho a es o
he easu y Eu o-Dolla a e. Fu he mo e, o ecas e o a iance decomposi ions (FEVDs)
illus a e ha mone a y policy has unclea cla i ica ion o c edi isk. Howe e , mone a y
policy has an impac in con olling asse p ice bubbles and inancial c ises ia s ock e u ns,
which a e di ec ly a ec ed by mone a y policy. Addi ionally, mone a y policy indi ec ly
impac s c edi isk ia i s impac on he easu y Eu o-Dolla a e.
4. Me hodology
4.1 A heo e ical model o he eal exchange a e
In de ec ing he eal exchange ola ili y sou ces in Egyp , his pape es ima es a h ee-
equa ion open mac o model p oposed by Cla ida and Gali (1994) based on ea lie s udies o
Do nbusch (1976),Obs eld (1985) and Blancha d and Quah (1989). The ollowing model
p esen s a s anda d h ee- a iable ec o au o eg essi e (VAR), employing a long- un
iden i ica ion scheme
yd
¼d þδq 
σ
½i E ðp þ1p Þ (1)
p ¼ð1∅ÞE −1Pe
þ∅pe
(2)
ms
p ¼y γi (3)
i ¼E ðs þ1s Þ(4)
The model p esen ed abo e employs is In es men -Sa ing and Liquidi y p e e ence-Money
supply (IS-LM) amewo k which includes wo equa ions o p ice se ing o goods, se ices
and capi al. Equa ion (1) illus a es he demand side o he economy o goods and se ices,
exp essed h ough IS equa ion ha a e ep esen ing an open economy. In his equa ion, he
ela i e demand on ou pu yd
is a ec ed by ela i e demand shocks d , eal exchange a e q and
di e en ials o eal o m o in e es a e. Equa ion (2) calcula es he ela i e p ices a ime ,(p )is
a e age weigh ed expec ed p ice a ise wi hin ma ke ’s clea ance which is balancing ma ke
ou pu a ime . The s anda d o LM model is shown in Equa ion (3). The ela i e eal money
balances (ms
−p ) a e depending on ela i e ou pu and in e es a es de e en ial. Equa ion (4)
es ablishes he ela i e in e es a e based on co e ing pa i ies condi ion o he in e es a e,
whe e (s ) ep esen ing exchange a e in i s nominal e m.
The s ochas ic p ocess is mos ly go e ning he ela i e ou pu supply, ela i e ou pu
demand and ela i e money Cla ida and Gali (1994). Fu he mo e, ela i e o m o supply and
money ollowing andom walk p ocess. The e ec o supply shocks as well money shocks
e ec is pe manen . Whoe e , model allows elemen s being momen a y as well pe manen
e ec o he ela i e shocks o demand d .
ye
¼ys
−1þ
ε
s
(5)
d ¼d −1þ
ε
d

αε
d
−1(6)
Exchange a e
luc ua ions in
Egyp
45
m ¼m −1þ
ε
n
(7)
The model solu ion, which can be ep esen ed as he e olu ion o e ime o he lexible p ice
equilib ium, is as ollows:
ye
¼ys
(8)
qe
¼ys
d 
δþ½δðδþ
σ
Þ−1
σαε
d
(9)
pe
¼m ys
þγð1þγÞ−1ðδþ
σ
Þ−1
αε
d
(10)
The model solu ion has shown h ee ypes o shocks exis ing. The shocks a e o ming om
supply, demand and mone a y. This solu ion cons i u es mo i a ed o ces o dis inc ion o
ela i e ou pu (y ), eal exchange a e (q ) and ela i e p ice le els (p ). Mos no ably, he
soli a y shocks a e in luencing ela i e ou pu a e supply shock, while supply and demand
shocks a e in luencing exchange a e, and all h ee shocks a e in luencing p ice le el.
4.2 Model amewo k
This sec ion expands upon a o emen ioned model and conduc s an es ima ion o a h ee-
a iable VAR sys em as s a ed in Abou-Zaid and Alabdulwahab (2013). In his sys em,
X ¼½Δy Δq Δp , whe e y ¼ðy home −y ROW Þ, ep esen ing he dispa i y be ween eal
income in Egyp and eal income o he es o he wo ld (ROW). Fu he mo e, a iable q
deno es he REER, while p ¼ðp home −p ROW Þ e e s o he di e gence be ween domes ic
p ice and p ice o he ROW. The u iliza ion o p ices and ou pu aims iden i ying any shocks
which may ha e an asymme ic impac on global economy.
In e m o s a iona i y, y ,q and p should be in eg a ed o o de one, hus he a iables in
X a e s a iona y. T i a ia e mo ing a e age model in he s uc u al dis u bances has he
o m o he ollowing ma ix
2
4
Δy
Δq
Δp
3
5¼
C11ðLÞC12ðLÞC13ðLÞ
C21ðLÞC22ðLÞC23ðLÞ
C31ðLÞC32ðLÞC33ðLÞ
2
6
4
3
7
5
2
6
6
4
ε
s
ε
d
ε
n
3
7
7
5
whe e
ε
s
,
ε
d
and
ε
n
a e join ly unco ela ed. Iden i ica ion o shocks is es ablished ia en o cing
a condi ion ha agg ega e demand shocks do no ha e a long- e m in luence on he le el o eal
ou pu , whe eas mone a y shocks do no impac he le el o ei he eal ou pu o eal exchange
a e in he long un. This es ic ion is exp essed as he cumula i e e ec o demand which is
mone a y shocks on Δy being ze o in he long un, as indica ed by S azka-Gaw ysiak (2006).
X
∞
i¼0
ðΔy Þ
Li
ε
d
¼0 (12)
X
∞
i¼0
ðΔy Þ
Li
ε
n
¼0 (13)
X
∞
i¼0
ðΔq Þ
Li
ε
n
¼0 (14)
The iden i ica ion app oach desc ibed abo e has a c ucial bene i in ha i does no impose
any concu en es ic ions on he sys em. Thus, he immedia e esponse o he endogenous
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9,1
46
a iables o di e en ypes o inno a ions can be en i ely es ablished based on he da a, as
no ed by S azka-Gaw ysiak (2006).
4.3 Da a and da a desc ip ion
The da a is ob ained om he In e na ional Financial S a is ics da abase (IFS), Wo ld Bank
da abase and Wo ld Economic Ou look (WEO). The a iables used a e seasonally unadjus ed
annual da a o eal g oss domes ic p oduc (GDP), which was acqui ed om he IFS
da abase. The REER was calcula ed based on IMF o mula [1]. The p ice le el which is he
Consume P ice Index (CPI) o Egyp was acqui ed om he IFS da abase and ha o he
ROW was acqui ed om he Wo ld Bank da abase. The da a consis o one-sample uns om
1980 o 2016. Fo eliable esul s, he cu o da e o da a used is 2016, ma king he beginning
o he new exchange a e egime (libe aliza ion).
The VAR model can be es ima ed in di e en s uc u es. The model can ake in o accoun
he linea i y o he ela ionships be ween he a iables in he ocus model. Ozcelebi and
Tokmakciogul (2022) used he Time-Va ying Pa ame e Vec o Au oReg essions (TVP-
SVAR) model o examine he asymme ic e ec o geopoli ical isk on oil p ices and oil
p oduc ion. They ound ha he e ec o geopoli ical isk is symme ic o e oil p ices and oil
p oduc ion. Fu he mo e, Ozcelebi (2019) in es iga ed in e nal and ex e nal economic ac o s’
impac s on he Exchange Ma ke P essu e Index (EMPI) in coun ies o Eas e n Eu ope, such
as he Czech Republic and Poland, as well as in Russia and Iceland. The s udy used he SVAR
model o examine he asymme ic impac o in e nal and ex e nal economic ac o s on he
EMPI in he ocused coun ies. Poland and he Czech Republic ha e shown ha exchange
ma ke p essu e is educed by he imp o emen o he Cu en Accoun Balance (CAB), which
is a esul o impulse esponse unc ion (IRF) assessmen . Asymme y in he EMPI may be
p esen when in la ion changes. Howe e , a decline in he cu en accoun balance would
deno e mo e specula ion ac i i ies in Poland and Iceland. Fu he mo e, inc easing he le el o
he in e es a e and in la ion would esul in an inc ease in he exchange a e in he ocused
coun ies. On he o he hand, he EMPI would no be educed by he dec ease in he in la ion
a e, which was he case in Iceland and Russia.
To ensu e he linea i y o he model, ollowing Ozcelebi and Tokmakciogul (2022) and
Ozcelebi (2019), he Ramsey Reg ession Equa ion Speci ica ion E o Tes (RESET) was used
in he eg ession. The esul shows ha he model is ee o e o speci ica ion, and we ail o
ejec he null ha he i ed eg ession is ee o e o speci ica ion since he alue is 0.7826
wi h a p alue o 0.4394. Fo a obus ness check, we es ima e posi i e and nega i e a i udes
o he explana o y a iables o es hei impac on he exchange a e. The Wald es shows
no di e ence be ween posi i e and nega i e a i ude impac s on he eal exchange a e o
eal GDP and he Consume P ice Index as explana o y a iables. The Wald alues o bo h
a iables a e 0.8232 (0.4201) and 1.0427 (0.3095), espec i ely, indica ing ha we ail o
ejec he null hypo hesis ha he nega i e and posi i e impac s a e he same o e he
dependen a iables.
To ensu e he s a iona i y o he da a and p ope ly speci y he VAR sys em, we pe o m
augmen ed Dickey–Fulle uni oo (ADF) and Akaike in o ma ion c i e ion (AIC) es s.
Table 1 p esen s he esul s o he ADF and AIC es s, which indica e he p esence o he uni
ADF s a is ic yq p
Δ
y
Δ
q
Δ
p
Egyp 0.84 1.017 1.47 2.64 2.94 1.93
Lags 2 3 2121
No e(s): The ADF c i ical alues o 34 obse a ions sample pe iod a e 2.61 (10%), 2.94 (5%) and
3.62 (1%)
Table 1.
Uni oo and
s a iona y es s
Exchange a e
luc ua ions in
Egyp
47
con adic ion o he sou ce o eal exchange a e luc ua ions may esul om he Eu opean
Union es ic ing membe s o he union om an excessi e use o hei iscal policy. Howe e ,
Ape gis and Ka akis’s (1996) esul migh be a good example o mone a y policy
implemen a ion when compa ed o coun ies ha ha e less mone a y policy e ec i eness.
One majo ad an age o his s udy lies in i s ea u e o highligh ing he majo sou ce o
luc ua ions in he eal exchange a e in Egyp . In con olling o eal and nominal shocks,
policy-make s should ocus on minimizing demand dis o ions in he sho un o s abilize he
alue o he pound. The go e nmen should assess i s expendi u es o ensu e ha demand
dis u bances will no esul in exchange a e ins abili y. Addi ionally, he go e nmen should
analyze he impo s bill, which pu s mo e p essu e on he Egyp ian pound and in es locally
in goods wi h high demand o o eign cu ency o be independen o impo ing hem.
Mo eo e , mone a y au ho i ies should e alua e hei policy e ec i eness in he economy o
ensu e hei goal achie emen a e policy implemen a ion. As he esul s show ha
mone a y policy has a negligible impac on he exchange a e, he cen al bank o Egyp
should eassess i s mone a y policy ega ding in la ion a ge ing o exchange a e
luc ua ions o ensu e i s e ec i eness. In sho , mone a y policies ega ding s abilizing
he exchange a e h ough in e es a e changes o a ac mo e o eign capi al seem o be
ine ec i e in he long un. Tha is, highe in e es a es may p omp capi al in lows in he
sho un, bu in he long un, Egyp expe ience a e e se in capi al lows, which o se
he impac o he mone a y policy. The la es libe aliza ion o he exchange a e in Egyp and
he adop ion o a ee- loa ing egime may be majo solu ions o he cu en issue.
No es
1. The eal e ec i e exchange a e has been calcula ed based on B odsky’s (1982) me hod. The ade
weigh ed eaches a maximum o 78 pe cen o o al ade du ing he pe iod o s udy and a minimum
o 67 pe cen . Exchange a es, ade alues, and coun y CPI alues we e ob ained om WEO, he
Di ec ion o T ade S a is ic (DOT) da abase and he In e na ional Financial S a is ic (IFS) da abase,
espec i ely.
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Co esponding au ho
Sami Zaki Alabdulwahab can be con ac ed a : [email p o ec ed]
Fo ins uc ions on how o o de ep in s o his a icle, please isi ou websi e:
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