Are Structural VARs with Long-Run Restrictions Useful for Developing Monetary Policy Strategy in Egypt?

Review of Pacific Basin Financial Markets and Policies, Vol. 12, Issue 3, pp. 509-527, 2009

Posted: 18 Oct 2009  

Ahmed Hachicha

University of Sfax - Faculty of Economics and Management (FSEGS)

Cheng-Few Lee

Rutgers University, Newark, School of Business-Newark, Department of Finance & Economics

Date Written: September 2009

Abstract

On the basis of SVAR models of monetary policy in Egypt for the period December 1976-May 2006, our paper explores a new empirical assessment for the interest rate channel in correcting trouble in the Egyptian economy by imposing contemporaneous and long run restrictions. It appears that after a monetary policy expansion, output is stable in the first period, rises temporarily reaching the baseline at t = 40, and the global monetary aggregate rises but not significantly. In addition, the price level rises with great difficulties in response to a negative interest rate shock to the global liquidity aggregate. The excess of money supply has a transitory effect on the Egyptian output but it causes inflation pressures.

SVAR Blanchard and Quah (1989) estimation reveals contradictory results to the previous findings. Last but certainly not least, this means that the effect of bank lending and the interest rate channels on the economy are limited in time.

The paper shows that the transmission of monetary policy through the interest rate channel has become weak in the short run but more important in the long run. Nonetheless, the bank lending channel through the commercial bank lending is not a potent monetary transmission mechanism.

Keywords: Monetary policy, bank lending channel, interest rate channel, Egyptian economy, SVAR models, contemporaneous restrictions, long run restrictions

Suggested Citation

Hachicha, Ahmed and Lee, Cheng-Few, Are Structural VARs with Long-Run Restrictions Useful for Developing Monetary Policy Strategy in Egypt? (September 2009). Review of Pacific Basin Financial Markets and Policies, Vol. 12, Issue 3, pp. 509-527, 2009. Available at SSRN: https://ssrn.com/abstract=1487985

Ahmed Hachicha (Contact Author)

University of Sfax - Faculty of Economics and Management (FSEGS) ( email )

Route de l'aƩrodrome km 4.5
Sfax, sfax 3018
Tunisia

Cheng-Few Lee

Rutgers University, Newark, School of Business-Newark, Department of Finance & Economics ( email )

111 Washington Avenue
Newark, NJ 07102
United States
732-445-3907 (Phone)
732-445-5927 (Fax)

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