Estimating the Asymmetric Effects of Exchange Rate Changes on Price Stability in the Egyptian Economy: A Nonlinear Autoregressive Distributed lags Approach

Abstract

This study distinguishes between the effects of negative and positive changes in the real exchange rate on inflation in the Egyptian economy using annual data on inflation rates, real exchange rate, GDP, and money supply, during the period (1974-2017). The study applied a Nonlinear Autoregressive Distributed lag (NARDL) model for testing the existence of asymmetric inflationary responses to exchange rate changes.

The results of NARDL model rejected the symmetry hypothesis of the inflationary effects of negative and positive changes in the exchange rate, while the asymmetry hypothesis was accepted. The results indicated that the inflationary effects of negative changes in the exchange rate of the Egyptian pound were much greater than the effects of positive changes in both the long and short-runs. Thus, if the Central Bank of Egypt wants to influence the exchange rate of the Egyptian pound, it must take into account the asymmetric inflationary responses to any changes that may occur in the exchange rate.