Between Autonomy and Effectiveness: Unravelling the Relationship between Fiscal Deficits, Monetary Base Evolution, and Central Bank Autonomy in Egypt

This paper aims to clarify the extent to which monetary policy in Egypt is affected by the fiscal deficit by implementing a model that depicts how the monetary authorities, expressed in terms of changes in the monetary base, respond to the evolution of the monetary policy objectives, in the presence of a large and chronic fiscal deficit over the period 2000 to 2022. Considering the year 2011 (the year of the social revolution) as a turning point that resulted many far-reaching social, economic and political consequences; Accordingly, the period divided into two periods, the period preceding the social revolution in 2011, and the other following it. We employed autoregressive distributed lag (ARDL) modeling and the error correction model to determine the presence of a long-run equilibrium relationship between the variables, which eventually demonstrated significant cointegration in the long run. Our findings showed different results before and after 2011. Before the revolution, fiscal policy seemed to play a slight role in determining monetary policy in Egypt and at some level, the Central Bank of Egypt (CBE) was seen to have a certain degree of autonomy during this period. Post-revolution, however, shows the budget deficit at a high level of influence on the monetary base.  This result leads us to question the extent and ability of the CBE to avoid financial policy pressures resulting from conditions of economic instability during the post-2011 period.