Inflation Targeting In The Case Of Egypt PDF Download

Inflation targeting (IT) was introduced in the early 1990s. IT theory, emerged years later, and allows a response to the exchange rate, only insofar as the latter affects the inflation forecast. However, this conclusion does not seem well-adapted to EMEs who departed from the conventional IT regime by giving a large place to the exchange rate.The objective of this thesis is to revisit the role of the exchange rate under IT in EMEs. In the case of Egypt, the aim is to study whether the exchange rate would constrain IT implementation and why. In particular, the thesis empirically explores nominal exchange misalignments and exchange rate pass-through to inflation as possible rationales for exchange rate management. Additional issues are explored like the scope of sterilized intervention under floating regimes, “fear of floating” and estimating de facto exchange rate regimes.The results show that the Central Bank of Egypt continues to limit exchange changes, despite abandoning the exchange rate target in 2003. This is because nominal exchange rate misalignments tend to be persistent and the exchange rate pass-through to CPI inflation is large and increasing. This should not be an obstacle to IT since exchange rate management would be the means to low inflation. In due time, reforms and credibility gains should lead to a low inflationary environment, improve the workings of the flexible exchange rate regime and be conducive to less erratic exchange rate fluctuations with adverse domestic repercussions.