Effectiveness of Interest Rate in Inflation Targeting in Egypt during the Period 1990-2022

This research aims to analyze the relationship between the interest rate and inflation in Egypt, using the data for the period 1990-2022, and using the non-linear autoregressive distributed lag (NARDL) methodology, which allows testing theimpact of negative and positive shocks of the interest rate on inflation as well as on savings.
The study concluded that there is no significant effect of the interest rate on inflation in the long term, whether it is the nominal or real interest rate, and it found that there is no significant effect of the real interest rate on the savings rate in the long-term. While the results of the analysis in the short term indicated that there is a direct and significant relationship between the inflation rate and the first lag of the positive shocks of the nominal interest rate, and the existence of an inverse and significant relationship in the short term between the inflation rate and the first lag of the negative shocks of the real interest rate, and the existence of an inverse and significant relationship between the lags of the negative shocks of the real interest rate and the savings rate.
The study concludes that the interest rate is ineffective as a tool for targeting inflation in Egypt during the research period. Raising the interest rate does not affect inflation, but at the same time it can deepen recession and increase financial burdens and instability, and then the need for alternative solutions emerges, the most important of which is the use of fiscal policy to reduce the deficit through fiscal control, it leads to reduce aggregate demand and inflation. Therefore, the mix of monetary and fiscal policies used to treat inflation is of great importance compared to the alternative approach that leaves monetary policy to work alone.