Thesis (M.Sc.) - Cairo University - Faculty of Economics and Political Sciences - Department of Economics

A small scale, dynamic stochastic general equilibrium model (DSGE) of a small open economy is estimated for Egypt using Bayesian techniques to gauge the Central Bank of Egypt (CBE) policy response to exchange rate movements. Alternative policy rules, which reflect the main policy tool: interest rate, are considered where the CBE is presumed to respond to changes in inflation, output and possibly exchange rate movements. Alternative specifications of the Taylor construct, including the rules with lagged, contemporaneous and expected variables, are employed to test the robustness of the policy results of the models. The findings suggest that the estimated policy coefficients and other parameters of the model including the contemporaneous policy rule equation fit the data well. The results reveal that the behavior of the CBE is geared towards exchange rate targeting more than inflation targeting during the period under examination. A posterior odds test suggests that the CBE responds to exchange rate movements, in the benchmark model and the model containing the contemporaneous policy rule, thus the CBE does respond to exchange rate changes

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