Towards inflation targeting in Egypt: the relationship between exchange rate and inflation

Abstract

Since the Egyptian economy has recently moved towards inflation targeting, it became very important to know whether exchange rate movements have serious inflationary implications or not. To investigate this subject, the study aims to analyse the relevance of inflation with the exchange rate by using the Granger-causality test. Two indicators of inflation will be used, the consumer price index (CPI) and wholesale price index (WPI). In general, the results show a strong relationship between the two variables in a way that may give support to the application of ‘flexible inflation targeting regime instead of strict inflation targeting regime’.