The Determinants of Inflation in Egypt: An Empirical Study (1991-2012)

This paper investigated the determinants of inflation in the Egyptian economy. Using annual data, covering the period (1991-2012), a Vector Auto Regression Model (VAR) was estimated. The results of the empirical model confirmed that inflation rate responds positively in the first period following shocks to itself, domestic liquidity growth rate, output gap, exchange rate depreciation, and world food prices. Also, expectations seemed to play an important role as inflation rate responds positively to a shock in itself in the first year following the shock, which reinforces the idea that inflationary expectations will generate more inflation. In the short run inflation is explained mostly by its own fluctuations followed by output gap, domestic liquidity growth rate, and nominal depreciation of the Egyptian pound against the US dollar, while in a 5-year horizon about 56% of inflation dynamics can be attributed to factors other than inflation expectations "itself".