The Elasticities Approach to Egypt’s Balance of Payments and Equilibrium Exchange Rate

The study aims to calculate Egypt’s real effective exchange rate at both the bilateral and multilateral levels, estimates the effect of real cross-rate movements on trade in goods and services and on foreign direct investment, and determines the fundamental equilibrium exchange rate for Egypt’s balance of payments. As part of this process, the study specifies and estimates a balance of payments model with considerable disaggregation in its trade components. The model provides a theory-consistent representation of the behavioral relationships in the balance of payments, and it offers forecasting and policy simulation capabilities targeted to the needs of the Government of Egypt. As such, the model serves a dual purpose. First, it provides a framework for making rational and consistent predictions about the standard components of the balance of payments. Secondly, it offers a means of quantitatively evaluating the impact of exchange rate policies on the balance of payments.