CHALLENGES FOR ADOPTING INFLATION TARGETING REGIME IN EGYPT

This study intends to investigate challenges facing the CBE for adopting IT regime. Through exploiting the experience of Czech Republic, Poland, and Brazil in the early days of their adopting IT the study underscores the following challenges; (i) A more active role to be played by the CBE is needed to convince decision-making circuits inside the government for the adoption of IT. (ii) The CBE should be factually independent. (iii) Coordination between monetary policy and fiscal policy should be established so that the inflation target given to the CBE is determined to ensure the government’s solvency. (iv) A satisfactory level of knowledge has to be acquired by the CBE concerning the following issues; the degree of the exchange rate pass-through effect, the level of real exchange rate, and both timing and effect of monetary transmission mechanisms. (v) Several questions are still unfulfilled concerning many issues (e.g. the measurement of price level that will be targeted, the design of the model that fits the Egyptian economy, variables included in the reaction function of the CBE, the reaction of the CBE to different shocks). (vi) Some institutional arrangements are urgently needed both to implement a household survey of inflation expectations and to improve and update the Egyptian statistics.