The Taylor Rule in Egypt: Is it Optimal? Is there Equilibrium Determinacy?

Mohamed Maher, Yanzhi Zhao () and Chuanzhong Tang ()
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Yanzhi Zhao: School of Public Administration, Dongbei University of Finance and Economics, China, Postal: School of Public Administration, Dongbei University of Finance and Economics, China
Chuanzhong Tang: International Business College, Dongbei University of Finance and Economics, China, Postal: International Business College, Dongbei University of Finance and Economics, China

Journal of Economic Integration, 2022, vol. 37, issue 3, 484-522

Abstract: We investigate Egypt's Taylor rule (interest rate targeting) between 1976 and 2019 by including the main economic variables in its reaction function. Using the Taylor principle, we investigate Egypt’s monetary policy optimality. To this end, we conduct the generalized method of moments (GMM) estimation procedure with different Taylor rule specifications to deal with potential endogeneity among variables. Our GMM estimates reveal that the partial adjustment coefficient is of considerable magnitude, indicating the explanatory power of policy inertia on many total variations in the current values of the nominal interest rate in Egypt. Furthermore, the inflation gap coefficient violates the Taylor principle, making the policy procyclical and inflation "spiral" and inducing divergence from the long-run equilibrium. Therefore, Egypt's Taylor rule, and thus monetary policy, reflects the indeterminacy of equilibrium and is a passive and destabilizing policy. Besides, the output gap coefficient was unexpectedly found to be insignificant.

Keywords: Monetary policy; Taylor rule; Taylor principle; Determinacy; Kapetanios test; Structural breaks (search for similar items in EconPapers)
JEL-codes: C36 E31 E43 E52 E58 E61 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:ris:integr:0857

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