The Relationship between the De Facto Exchange Rate Regimes and Inflation in Egypt

Abstract

The purpose of this study is to identify the relationship between de facto exchange rate regimes which have been followed in the Egyptian economy and the rate of inflation in the period 1974-2007. It addressed the theoretical and empirical studies that dealt with the relationship between exchange rate regimes and inflation and reviewed the de facto exchange rate regimes in Egypt. Since 1960, Egypt had already been applying two exchange rate regimes, the first exchange rate regime was a de facto crawling band with multiple exchange rates and the presence of a parallel market exchange rate in the period 1974-1990. The second one was a moving band which began in 1991, according to the classification of Reinhart and Rogoff 2004. This paper tried to measure the relationship between the two exchange rate regimes, and the rate of inflation. The study found a significant relationship between exchange rate regimes and inflation in the period under study. The rate of inflation under the pegged moving band regime of exchange rate increased by 4.81percent annually compared to the crawling band regime of exchange rate with multiple exchange rates.

The main cause of inflation in Egypt in the long term is the budget deficit, while the factors that limit inflation in the long term are spending on fixed capital formation, private consumption expenditure and government consumption expenditure.