Conference Paper
Exchange Rate Management and Monetary Autonomy in Egypt
No.
ERF32AC_139
Publisher
ERF
Date
May, 2026
Topic
E4. Money and Interest Rates
F4. Macroeconomic Aspects of International Trade and Finance
E5. Monetary Policy, Central Banking, and the Supply of Money and Credit
E6. Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
This paper investigates the extent of monetary autonomy in Egypt amidst a history of active exchange rate management. First, we construct an Exchange Market Pressure (emp) statistic for 2005–2024 to quantify the magnitude of foreign exchange market disequilibrium and identify the policy tools used to absorb it. Second, we implement a three-dimensional Structural Vector Autoregression (SVAR) model to formally test monetary autonomy by assessing the impact of domestic monetary shocks on the exchange rate-adjusted differential between Egyptian and US interest rates on similar financial assets. Our findings reveal that of the three distinct episodes of heightened external accounts pressures (2008, 2011-2016, and 2021-2024), the latter (most recent episode) has been the most severe. The SVAR analysis confirms that while Egypt maintains a degree of monetary autonomy over the full sample, it is compromised by the policy mix that stabilizes the exchange rate amidst foreign capital outflows. The empirical findings show that monetary shocks explain a negligible portion of the variance in the exchange rate-adjusted interest rate differential, indicating that domestic monetary policy actions can only cause a minor “wedge” in the uncovered interest parity (UIP) condition. Breaking down the full dataset into sub-periods of interest also reveals interesting findings: Monetary autonomy has been generally stronger during the 2013–2018 transition, but was completely lost when the exchange rate was heavily managed during mid-2021–early-2024; a period characterized by the highest emp relative to previous similar episodes. Our results provide timely evidence on the constraints imposed by the macroeconomic policy mix in Egypt, particularly during the recent period of heightened volatility, and empirically demonstrate the trade-offs inherent in the macroeconomic policy trilemma.
Research Associates
Sara Alnashar
Senior Country Economist, The World Bank’s Middle...
Authors
Mazen Fathy
Research Associate, J-PAL Middle East and North...