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After maintaining a currency peg to the US$ for more than 40 years, Egypt announced the float of its exchange rate in 2003. Yet, the somewhat stable exchange rate suggests that it continues to be managed by the Central Bank of Egypt. The objective of this paper is to assess whether monetary policy significantly changed after the float. It first applies co-integration methodology using monthly data from 1981 to 2008 to show that there is a long-run relationship between the LE/US$ exchange rate and monetary fundamentals. A vector error-correction model shows that the speed of exchange rate adjustment to long-run equilibrium is slow suggesting that exchange rate misalignments are persistent.
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