Much Ado about The Egyptian Pound: Exchange Rate Misalignment and The Path Towards Equilibrium

Source: The Egyptian Center for Economic Studies

Author(s): Diaa Noureldin

Original Link: http://www.eces.org.eg/Publication.aspx?Id=634&Type=10

Summary:

This paper estimates Egypt’s equilibrium real exchange rate and exchange rate misalignment based on economic fundamentals over the period 2001Q3-2017Q3. Focusing on the more recent period, we find that the Egyptian pound was undervalued by about 22.3 percent in 2017Q1 due to overshooting its equilibrium value after floating the currency in 2016Q4. The currency undervaluation then declined to 18.5 percent in 2017Q3 driven by an increase in the real effective exchange rate due to a surge in domestic inflation. With regard to the determinants of the equilibrium real exchange rate, we find the productivity differential (vis-à-vis Egypt’s trade partners) and trade openness to be the most significant factors. We also provide projections for the equilibrium real exchange rate and exchange rate misalignment until 2020Q4…

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