Effectiveness of the Inflation-Targeting Framework in the Egyptian Economy

The primary goal of the present study was to assess the efficacy of the inflation-targeting framework (ITF) within the Egyptian economy. This was achieved by scrutinizing the monetary policy framework (MPF) from 2005 to 2022 and measuring its effectiveness in realizing monetary policy objectives (MPs). The approach involved constructing a macroeconomic model that captures the interconnections among macroeconomic variables (real and monetary), whether they serve as targets or instruments of MP or are otherwise closely associated variables. The model also helps to estimate the sensitivity coefficients of macroeconomic variables (real and monetary) related to changes in interest rate, exchange rate, money supply, and real output and then to identify how the impact transfers between monetary variables and related macroeconomic variables, as well as the amount of that impact. Using a quarterly series constructed from the original annual data via a Bayesian temporal disaggregation procedure (2005Q1–2022Q4), our findings conclude that there is a mechanism in the Egyptian economy to transfer the impact to and from the basic macroeconomic variables (household and investment expenditure, net exports, money demand, interest rate, and real output). This reflects the responses of the household and business sectors in their decisions on changes in both the real interest rate and the level of output. However, the extent to which the impact of monetary policy instruments was transmitted to the main monetary target value (money supply) and subsequently to real output (or economic growth) was significantly low, indicating the weak effectiveness of the ITF in the Egyptian economy.