Effects of Exchange Rate on Economic Growth of Egypt According to Prevailed Exchange Rate Regimes During 1990-2019

Abstract

The main objective of the study is to investigate the effects of Real exchange rate on economic growth in Egypt. Time series annual data for the period of 1990-2019 was used during using the Vector Auto Regression (VAR) model, which shows the bilateral relations between the variables through the Engle Granger Causality test known as the joint integration test, to reach the best model  can count on in explaining the study hypothesis regarding the effectiveness of the exchange rate in raising the rate of growth of the Egyptian economy in the short, medium and long terms, and determining the compatibility of the statistical results with economic theory implementing on the Egyptian economy.

The study concluded to reject the hypothesis, that there is direct relationship between liberalizing exchange rate policies and GDP growth in Egypt during the study period. This paper offers a systematic survey of recent research evaluating the impact of the level and volatility of the real exchange rate (RER) on economic growth. The paper also surveys the literature studying the mechanisms that explain the growth effect of the Real Exchange Rate. Part of them emphasize that an undervalued RER reduces macroeconomic volatility, favoring capital accumulation and growth. Another part stresses that a competitive RER stimulates capital accumulation in modern trade-able activities, facilitating structural change and economic development. Results showed that real exchange rate was significant and negatively correlated with economic growth.

The study recommends among other things, the monetary authorities and Egyptian government to formulate sound macroeconomic policies that are capable of restoring the economy on track with stable rates that promote growth.