Challenges for Adopting Inflation Targeting Regime in Egypt

Abstract
This study intends to investigate challenges facing the CBE for adopting IT regime. Through exploiting the experience of CzechRepublic, Poland, and Brazil in their early days of adopting IT the study highlights the following challenges that are facing the CBE; (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; Which measurement of price level that will be targeted? What are variables that will be included in the objective function of the CBE? And what are relative weights that will be assigned to these variables? What is the model that fits the Egyptian economy? How would the CBE react to both supply shocks and asset-price bubbles? What is the equilibrium level of both real FX rate and property prices? How can the CBE detect deviations of both the actual real FX rate and actual property prices from their equilibrium levels in real time? Are the MPC members qualified enough to give adequate assessment of the risks of the forecasts and the associated decisions? (vi) Some institutional arrangements are urgently needed both to implement a household survey of inflation expectations and to improve and update the Egyptian statistics in order to meet the international criteria, especially that used by the IMF under the DQAF.