Investigating the Trajectory of Egypt’s Potential Output: Pre and Post the Arab Spring

The Egyptian economy has witnessed a plunge in its main macroeconomic indicators after the Arab spring as reflected in the estimated Economic Stability Trend Index (ESTI). The main purpose of the paper was to estimate Egypt's potential output and identify the factors that might be responsible for the divergence of actual and potential output from each other. The production function approach was used to derive estimates of both potential output and output gap over the period (1990-2014). The results of the analysis revealed that capital stock was the dominant factor contributing to potential GDP growth in Egypt, while the shares of both labor and total factor productivity in potential GDP growth rate have been fluctuating over time. Intellectual property protection, efficiency of the legal framework in settling disputes, strength of investor protection, and other factors exhibited a strong positive relationship with output gap in Egypt over the period (2010-2014).