Monetary policy responses to the global financial crisis: A case study of Egypt

Abstract

Among the triggers of the Arab Spring are the declining living standards of the middle and lower income groups. Undoubtedly, the global financial crisis (GFC) is to be partially blamed for weakening the economies of these nations. But was monetary policy ineffective in combating inflation and reducing the meltdown? This paper employs a dynamic stochastic general equilibrium model to assess the effectiveness of the monetary policy in the wake of the GFC. Egypt is selected as a case study due to its overdependence on imported food, the prices of which are relentlessly soaring. The results of the study reveal that the ideal operating targets for the Central Bank of Egypt are the overnight rate and legal reserve requirements. Interest rates are more suitable for long-run impact on the ultimate goals of growth, price stability and job creation. The study culminates in designing a framework to enhance central bankers’ political independence and transparency, which is imperative for nations with high levels of corruption. The study is not only informative to the new Egyptian policymakers, but also to other developing and emerging economies that suffer from symptoms of chronic inflation and looming socio-political turmoil.