Switching to the Inflation Targeting Regime: The Case of Egypt

This study analyzes switching the currently applied monetary policy regime in Egypt to the inflation targeting (IT). The study attempts to answer two broad questions. Firstly, does Egypt need to change the currently applied monetary policy regime, i.e. monetary targeting regime? Secondly, is Egypt ready to apply the IT regime? The main conclusions of the study came as follows: (i) The central bank of Egypt (CBE), till now, could not achieve the goal of price stability. (ii) The CBE, in principle, cannot achieve the goal of price stability under the currently applied monetary targeting regime because of instable demand for money function in the Egyptian economy. (iii) Under instable demand for money function, the CBE does not have another option than to adopt IT to achieve price stability, especially after floating the FX rate in the start of 2003. (iv) Three prerequisites are frequently demanded for a successful IT; factual independence of the CB, commitment to price stability as a primary goal of monetary policy, and forecasting capabilities. (v) Despite the need to switch to the IT, the CBE is not ready to apply a successful IT regime because of unfulfilling the prerequisites for IT.