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

It has been an ongoing challenge for economists to examine the underlying relationship between the exchange rate and prices, known as exchange rate pass-through. The theoretical and empirical literature stipulated that exchange rate shocks do influence the domestic price of imports. This shock is transmitted to producer and then consumer prices. In order to estimate and analyze the degree of exchange rate fluctuations pass-through to domestic prices, it is essential to understand the country{u2019}s exchange rate policies and examine the trends of inflation rate. Accordingly, this study presents an overview of the Egyptian macroeconomic environment, as well as its monetary policy. Since the early 1990s and through the adoption of flexible exchange rate regime and inflation targeting (IT) policy, the monetary policy in Egypt has evolved significantly. The study then utilizes a Structural Vector Auto-regression (SVAR) model, drawing on Bernanke (1986) and Sims (1986), to empirically examine and analyse the pass-through of exchange rate fluctuations to domestic prices in Egypt. The study uses monthly data covering the period 2003- 2013. The findings of the baseline model reveal the presence of a modest, incomplete and non-persistent exchange rate pass-through in Egypt. This finding can be attributed to the distortions in the CPI, as well as the authorities{u2019} behaviour in manipulating prices (i.e. export ban). Another possible explanation is that the Egyptian economy is not so open. Moreover, the study finds that the pass-through effect follows the direct exchange rate pass-through channels on domestic prices in Egypt

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