Volume 3, Issue 2

The recent banking and exchange rate crises in Latin America, East Asia, Eastern Europe and Turkey have proved that a fixed exchange rate is unsustainable in the context of growing financial globalization. The other corner solution advocated by the IMF—the free float—makes economies subject to high fluctuations. Therefore, the main question for most emerging market economies, and particularly for Egypt since January 2003, is what kind of managed float to have. This paper presents a single-equation econometric model approach to define the variables that determined the real exchange rate behavior in Egypt during the 1971–99 period as an indicator of the government’s de facto exchange rate policy. The empirical findings confirm that the Egyptian economic policy mix has almost always led to some real exchange rate volatility, which is inconsistent with the fixed exchange rate policy. Therefore, it is believed that the most viable solution for Egypt is the ‘managed bands’ regime around a crawling effective equilibrium central parity, with no pre-announced management bands parameters. This choice will allow Egyptian policy-makers to steer the economy out of the numerous regional and international political and economic shocks.

International portfolio diversification benefits between US stock markets and corresponding markets in Turkey and Egypt are examined from a short- and long-term perspective. The Johansen cointegration procedure reveals cointegration at the general index level related to some but not all sub-indexes investigated. Granger causality indicates, in general, causality running between USA and Turkey but only isolated cases involving Egypt. Overall, the results suggest that US investors can obtain diversification benefits at a sub-index level given a long-term investment horizon restricted to positions in one but not both Middle Eastern markets in one and the same portfolio. Short-term benefits involve the Egyptian market related to two out of three sub-indexes.

There is a large literature that examines purchasing power parity (PPP). The growth in this literature is mainly due to the absence of a consensus view on whether or not PPP holds. This paper considers PPP for 11 Middle Eastern countries using a number of tests: the one-break test unit root, the two-breaks unit root test, and the panel Lagrange multiplier (LM) unit root test with structural breaks. The main finding from univariate tests is that there is evidence for PPP in only seven countries (Lebanon, Saudi Arabia, Egypt, Iran, Syria, Tunisia and Sudan). However, when the panel LM test is applied with two structural breaks, strong evidence is found in favor of PPP for the Middle Eastern countries.

This paper investigates the empirical significance of the concept of credit rationing equilibrium. The evidence from a disequilibrium model of the credit market with application to Egypt provides support for this concept. In particular, loan supply is not found an increasing function of the return on intermediated credit. Also, expectations on the state of the economy appear to explain the changing pattern of credit rationing over time.

Food, Agriculture, and Economic Policy in the Middle East and North Africa. Hans Lofgren. Research in Middle East Economics, 5 (Oxford, UK: Elsevier Science Ltd for The Middle East Economic Association, 2003). 337 pp. ISBN 0-7623-0992-X.