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Journal of Economic Integration 2022 September;37(3) :484-522.
DOI: https://doi.org/10.11130/jei.2022.37.3.484
The Taylor Rule in Egypt: Is it Optimal? Is there Equilibrium Determinacy?

Mohamed Maher1,2 Yanzhi Zhao2 Chuanzhong Tang 3

1,2Department of Economics, Mansoura University, Egypt
2School of Public Administration, Dongbei University of Finance and Economics, China
3International Business College, Dongbei University of Finance and Economics, China
Corresponding Author: Mohamed Maher ,Email: econ3mmohamed@gmail.com and mohamed_maher16961737@mans.edu.eg
Copyright ©2022 Journal of Economic Integration
ABSTRACT
We investigate Egypt's Taylor rule (interest rate targeting) between 1976 and 2019 by including the main economic variables in its reaction function. Using the Taylor principle, we investigate Egypt’s monetary policy optimality. To this end, we conduct the generalized method of moments (GMM) estimation procedure with different Taylor rule specifications to deal with potential endogeneity among variables. Our GMM estimates reveal that the partial adjustment coefficient is of considerable magnitude, indicating the explanatory power of policy inertia on many total variations in the current values of the nominal interest rate in Egypt. Furthermore, the inflation gap coefficient violates the Taylor principle, making the policy procyclical and inflation "spiral" and inducing divergence from the long-run equilibrium. Therefore, Egypt's Taylor rule, and thus monetary policy, reflects the indeterminacy of equilibrium and is a passive and destabilizing policy. Besides, the output gap coefficient was unexpectedly found to be insignificant.

JEL Classification
C36: Instrumental Variables (IV) Estimation
E31: Price Level; Inflation; Deflation
E43: Interest Rates: Determination, Term Structure, and Effects
E52: Monetary Policy
E58: Central Banks and Their Policies
E61: Policy Objectives; Policy Designs and Consistency; Policy Coordination
Keywords: Monetary policy | Taylor rule | Taylor principle | Determinacy | Kapetanios test | Structural breaks
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