The Relationship between Financial Development and Inflation Rate in Egypt

Abstract

This study investigated the relationship between financial development and inflation in Egypt from 1980-2018. The study employed various econometric techniques, such as Johansen's test for co-integration, error correction model, Granger's causality test, Toda-Yamamoto causality test, and dynamic ordinary least squares model. The findings indicated that financial development had not significantly reduced inflation in Egypt over the studied period. Additionally, inflation was an obstacle to the country's financial development. The results also suggested a long-term equilibrium relationship between financial development and inflation, which is unidirectional and runs from inflation to financial development. The results revealed that the inflation rate, economic growth, exchange rate, and trade openness jointly impact financial development in the short and long term. It implied that the past values of these variables could be used to predict the current and future values of financial development. However, it was not possible to use the financial development index to predict the inflation rate in Egypt in the short and long term.