Inflation in Egypt: Internal or External Phenomenon

The aim of this paper is to identify precisely the most important determinants of inflation in Egypt over the period from 1976 to 2023 and investigate whether inflation in Egypt is internal or external phenomenon. To obtain the aim of the study, the NARDL approach of cointegration is utilized, and the long run equilibrium relationships, along with the short run dynamics coefficients are estimated simultaneously over the period of the study. The results of the study indicate that the government policies – monetary and foreign trade policies- are the key factor for controlling inflation in the short run, however, the real production and the gross national expenditure are the main players in the long run. Furthermore, the internal factors in Egypt play a more dominant role in the inflation surge. That is, national expenditure and a decrease in real income per capita, interest rate, and inflationary expectations better explain the change in inflation in Egypt than the oil and food price shocks. Finally, as far as the asymmetric effects are concerned, the findings demonstrate that prices in Egypt are flexible in upward direction, but steaky in the downward direction, which may cause market inefficiencies, and therefore, more inflationary pressures in the economy. Contractionary monetary policy is recommended to alleviate inflation in the short run, taking into consideration its effect on the growth. However, increasing production and reducing national expenditure is essential for controlling inflation in the long run.