Amr Hosny

Understanding the dynamics of the macroeconomic trilemma

This paper tests the autonomy of domestic monetary policy in the context of the macroeconomic policy trilemma for a large data-set of developing and developed countries covering three different time periods characterized with different exchange rate regimes and capital controls. The existing literature uses fixed coefficient methodologies to examine monetary policy independence; whereas we show that the coefficients of interest are unstable as countries switch between different exchange rate regimes and/or capital controls over time. The contribution is in using a time-varying parameter model that better captures the effects of the heterogeneity in different exchange rate regimes and capital mobility restrictions on monetary policy independence over time, allowing a more accurate test of the macroeconomic trilemma.

What does Egypt's Revolution Reveal about its Economy?

ABSTRACT On the third anniversary of the Egyptian revolution and against the backdrop of lingering political instability and deteriorating economic conditions, we diagnose the constraints to sectoral growth in Egypt using the 2011 Egyptian revolution as a natural experiment. We combine quantile regressions to study sector outliers with a difference in difference methodology to capture sectoral behavior before and after revolution. We find that the revolutions effect has been adverse, on average, but heterogeneous across sectors. We identify and characterize sectors most and least impacted. Results reveal that Egypts fastest growing sectors before Revolution have been the most vulnerable after Revolution. This evidence is supported by our diagnosis approach that shows that faster growing sectors are constrained by continuous increases in prices that threaten export competitiveness (as they erode the benefits accrued to nominal depreciation of currency). Such sectors also benefited from higher monetary growth and fewer constraints on credit availability that have mitigated somewhat the speed of deterioration in the aftermath of the revolution. Our results, which hold under several robustness checks, inform policy priorities as to how to revive investors’ confidence, boost competitiveness, and design priorities in industrial policy to ease structural impediments and align sectoral growth with macro priorities.

Egypt-EU commodity trade and the J-Curve

Due to data availability, most theories in international economics are tested by using data from developed countries. The J-Curve phenomenon, which summarises the short-run response of the trade balance to currency depreciation, is no exception. Egypt has kept close track of its commodity trade with her major trading partner, the European Union (EU). We use such trade data and test the J-Curve phenomenon for each of the 59 industries that trade between the two regions. Using quarterly data over the period 1994I-2007IV and the bounds testing approach we find support for the phenomenon in 24 out of the 59 industries.

Does inflation targeting lower inflation? If yes, then when?

Using a dataset of 170 developing and developed countries over the 1990-2011 period, this paper attempts an answer to the following two questions: (1) Does inflation targeting (IT) work? And (2) When does inflation targeting work? Using various propensity score matching (PSM) techniques, it is shown that IT does have a causal effect on inflation, thus improving on existing literature which mainly used OLS and/or panel methodologies. The more important contribution, however, is that we study the effect of the initial inflation rate on effectiveness of IT. Existing literature has loosely argued that IT would only be effective if initial inflation is low, while country experience suggests that IT is only adopted when initial inflation is high. Using quantile treatment effects, it is shown that IT is more effective in lowering inflation rates when initial inflation is high to begin with.

Avoiding the New Mediocre; Raising Long-Term Growth in the Middle East and Central Asia

Raising the Middle East and Central Asia’s long-term growth prospects is critical for meeting the regions pressing need for jobs and higher living standards.

Estimating Potential Growth in the Middle East and Central Asia

The Middle East and Central Asia’s economic growth potential is slowing faster than in other emerging and developing regions, dampening hopes for reducing persistent unemployment and improving the region’s generally low living standards. Why? And is it possible to alter this course? This paper addresses these questions by estimating potential growth, examining its supply-side drivers, and assessing which of them could be most effective in raising potential growth. The analysis reveals that the region’s potential growth is expected to slow by ¾ of a percentage point more than the EMDC average over the next five years. The reasons behind this slowdown differ across the region. Lower productivity growth drives the slowdown in the Caucasus and Central Asia and is also weighing on growth across the Middle East (MENAP); while a lower labor contribution to potential growth is the main driver in MENAP. Moving forward, given some natural constraints on labor, total factor productivity growth is key to unlocking the region’s higher growth potential. For oil importers, raising physical capital accumulation through greater investment will also play an important role.

Inflation, financial intermediation and growth: the case of Egypt

There is now a consensus in the theoretical and the empirical literature that a nonlinear relationship exists between the rate of inflation and the rate of economic growth. Using a threshold regression technique, this paper re-examines this relationship and the critical role that financial intermediation plays in it. Data to examine our hypothesis are from Egypt. We find that inflation contributes positively to economic growth until it reaches a threshold rate of about 12%, after which it becomes detrimental to growth. We then show that such a nonlinear relation is connected to whether or not financial deepening has crossed a certain threshold level. Given these thresholds, a coordination of policies (especially monetary) and financial reform is needed to achieve success in economic growth.