Monetary-Fiscal Policy Interactions During Uncertainty Shocks: Evidence from Egypt

Sarah El-Khishin and Dina Kassab ()
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Dina Kassab: Faculty of Economics and Political Science

No 1493, Working Papers from Economic Research Forum

Abstract: This paper empirically examines monetary-fiscal interactions during uncertainty shocks. Applying on the Egyptian economy, we examine the extent to which fiscal dominance and discretionary interventions resulted in undesired outcomes, particularly during uncertainty shocks. We construct a Structural VAR model to model monetary-fiscal interactions in Egypt during uncertainty. Alternative outcomes under counterfactual scenarios of monetary autonomy, as opposed to fiscal dominance, are examined under the New-Keynesian system of assumptions. Results show that poor monetary autonomy and sustained fiscal dominance contributed to establishing long-run procylical fiscal behavior in Egypt and significantly impeded the effectiveness of monetary policy in stabilizing the economy during uncertainty shocks. We recommend establishing a strong, commitment-based monetary policy framework to lessen the undesired outcomes resulting from the persistent fiscal dominance. Recent IMF-supported reform measures show a stronger role of monetary policy in stabilizing the economy within a coordinated framework. Nevertheless, proper institutional measures need to be established to sustain such outcomes after the materialization of the reform program.

Pages: 26
Date: 2021-10-20, Revised 2021-10-20
New Economics Papers: this item is included in nep-ara and nep-mon
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Published by The Economic Research Forum (ERF)

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