Revisiting the Exchange Rate Pass-Through to Domestic Inflation in Egypt: Why Is the Statistical Association Weak in the Short Run?

Abstract

This study investigates the question of “Why is the statistical association between exchange rate shocks and domestic inflation in Egypt weak?” The study relies on two econometric models, the SVAR model and the Markov switching regression model. Presenting results of statistical analysis showing that the exchange rate pass-through to domestic inflation in Egypt is weak and insignificant over the study’s whole period (2006Q1-2016Q3), but is significant for the sub-periods of 2006Q1-2010Q4 and 2011Q1-2016Q3. We explain the variations of both level and speed of exchange rate pass-through between the sub-periods by two factors: (i) monetary policy intervention to maintain targets for foreign exchange rates and real GDP growth; and (ii) structural change in the time series data resulting from a change in the macroeconomic policies.