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What Drives Prices in Egypt?

What Drives Prices in Egypt?: An Analysis in Light of International Experience

Edited by Hanaa Kheir-El-Din
Copyright Date: 2009
Pages: 256
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  • Book Info
    What Drives Prices in Egypt?
    Book Description:

    Since 2004, economic reforms in Egypt have led to robust expansion, a healthy external position, and enhanced investor confidence. But despite these positive macroeconomic developments, inflation has been steadily rising. Does fiscal policy threaten price stability? Does wage growth in the Egyptian economy lead price inflation, or is it the reverse? In this volume, these and other questions are examined by contributors who participated in a conference held in Cairo in late 2007. Here is a coherent and comprehensive analysis of the factors driving prices in Egypt, in an attempt to find a satisfactory balance between prices and economic growth. While Egypt is the focus of the analysis, the papers draw upon the relevant literature, and international experience, the findings can be applied to other middle-income economies. This timely study helps to explain the complex issues facing economists and policymakers, with proposals for reform. Contributors: Hala Abou-Ali, Hala Fares, Omneia A. Helmy, Alaa Ibrahim, Hanaa Kheir-El-Din, Rania Al-Mashat, Diaa Noureldin, Klaus Schmidt-Hebbel, and Sherine Al-Shawarby.

    eISBN: 978-1-61797-385-7
    Subjects: Business, Political Science, Economics

Table of Contents

  1. Front Matter
    (pp. i-vi)
  2. Table of Contents
    (pp. vii-viii)
  3. Contributors
    (pp. ix-x)
  4. Acknowledgments
    (pp. xi-xii)
  5. INTRODUCTION: What Drives Prices in Egypt?
    (pp. 1-8)
    Hanaa Kheir-El-Din

    High inflation is costly to an economy, with implications for both income and wealth. It erodes real income of fixed nominal income earners, especially civil servants and pensioners. Unanticipated inflation redistributes wealth from creditors to debtors, helping borrowers and hurting lenders. Inflation impairs economic efficiency because it distorts price signals. By making it harder to distinguish between changes in relative prices and changes in the overall price level, inflation can also lead to a misallocation of resources. Greater uncertainty about future prices tends to reduce the rate of investment and capital formation.

    Inflation builds up through three mechanisms: from the...

  6. CHAPTER 1 Great Moderation and Inflation Targeting in the World
    (pp. 9-36)
    Klaus Schmidt-Hebbel

    The last two decades have seen a major improvement in the world’s macroeconomic performance. Inflation levels and volatilities have declined and output growth rates are more stable in all major world regions. The inflation decline and the overall reduction in second moments of both inflation and output growth have been dubbed the Great Moderation after the more unstable decades of the 1970s and 1980s.

    Possible explanations for the Great Moderation can be grouped into four categories. First, improved institutional quality and stronger political and policy consensus in most countries could reflect a shift in preferences toward more macroeconomic stability. Better...

  7. CHAPTER 2 Measuring Inflation in Egypt: Assessment of the CPI Accuracy
    (pp. 37-82)
    Sherine Al-Shawarby

    Inflation is one of the most important indicators of macroeconomic stability. It also affects welfare and serves as a goal to public policy. Since the flotation of the pound in 2003, the Egyptian economy has been subject to waves of relatively high increases in prices. During each of these waves, a heated debate occurred about the accuracy of the official inflation rates in reflecting actual changes in prices. Most Egyptians, whether economists or not, would argue that the Consumer Price Index (CPI) underestimates actual increases in prices and, therefore, undermines living standards in Egypt. At the same time, the Central...

  8. CHAPTER 3 Inflation and Growth in Egypt: Is There a Threshold Effect?
    (pp. 83-108)
    Hanaa Kheir-El-Din and Hala Abou-Ali

    The purpose of this chapter is to investigate the relationship between two of the most important and most closely monitored macroeconomic variables: inflation and growth. The question of the existence and nature of the link between inflation and growth has been the subject of considerable interest and debate. The empirical literature has shown varying relationships across countries and across time. Theoretical analysis has discussed channels through which inflation may positively or negatively impact growth. Significant feedbacks from economic growth to inflation have also been addressed, highlighting the effect of fast economic growth (or the heating up of the economy) on...

  9. CHAPTER 4 Monetary Policy in Egypt: A Retrospective and Preparedness for Inflation Targeting
    (pp. 109-142)
    Rania Al-Mashat

    Inflation targeting (IT) is one of the operational frameworks for monetary policy aimed at attaining price stability. In contrast to alternative strategies, notably money or exchange rate targeting, which seek to achieve low and stable inflation through targeting intermediate variables—for example, the growth rate of money aggregates or the level of the exchange rate of an ‘anchor’ currency—IT involves targeting inflation directly (World Economic Outlook 2005). In a wider context, IT is part of a process in which economic policymaking is becoming more transparent and subject to greater accountability and technical rules, and less susceptible to discretionary actions....

  10. CHAPTER 5 The Impact of Budget Deficit on Inflation in Egypt
    (pp. 143-176)
    Omneia A. Helmy

    Despite growing consensus that the Central Bank of Egypt (CBE) should pursue price stability as its foremost goal, targeting macroeconomic stability could be problematic in the context of a weak fiscal position.

    The recent acceleration of inflation has triggered renewed interest in exploring whether the large budget deficit and the high level of domestic public debt are driving prices in Egypt. During 2001/02–2006/07, the change in consumer prices rose from 2.4 percent to 11 percent, and budget deficit averaged 9.2 percent of GDP, with domestic public debt reaching 93.1 percent of GDP in 2006/07.

    Some empirical studies on the...

  11. CHAPTER 6 Wage-Price Causality in the Egyptian Economy (1990–2005)
    (pp. 177-204)
    Hala Fares and Alaa Ibrahim

    Economic literature has identified several factors that are significant in inducing price changes. These factors include: rising labor cost, changes in exchange rate, supply shocks, excess demand generated by expansionary fiscal and monetary policies, and changes in import prices in an open economy (Metwally and Al-Sowaidi 2004). This chapter will focus on one of these factors, namely, the labor cost, trying to identify whether wage inflation is a cause or an effect of price inflation. Theories supporting the view that wage inflation leads to price inflation consider wages a cost factor, whose growth—assuming mark-up pricing—will cause price inflation....

  12. CHAPTER 7 Relative Price Adjustment and Inflation Dynamics: The Case of Egypt
    (pp. 205-242)
    Diaa Noureldin

    The recent surge in inflation in Egypt has stimulated a heated debate in academic and policymaking circles. After a period of stability in the second half of the 1990s, inflation rates soared to double-digit levels and have been subject to higher volatility amid a lack of understanding of its underlying dynamics. With this turbulent behavior of prices, there are doubts about the prospects for containing the associated negative impact.

    High and volatile inflation tends to reduce economic efficiency and has a negative impact on income and wealth distribution. It disrupts saving and investment decisions, with a negative impact on long-term...

  13. Index
    (pp. 243-250)