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  3. 2023
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  5. Policy Session: Banking and Monetary Policies in MENA in a Changing Financial Environment
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Policy Session: Banking and Monetary Policies in MENA in a Changing Financial Environment

Paper Session

Friday, Jan. 6, 2023 10:15 AM - 12:15 PM (CST)

New Orleans Marriott, Preservation Hall Studio 5
Hosted By: Middle East Economic Association & American Economic Association
  • Chair: Mahdi Majbouri, Babson College

Interaction Between Monetary and Fiscal Policy: Evidence from Egypt

Mona Fayed
,
Cairo University
Mai Mosallamy
,
Central Bank of Egypt
Mouchera Karara
,
Sovereign Fund of Egypt

Abstract

Surviving COVID-19 crisis would not have been possible without the unprecedented support measures implemented worldwide. Monetary and fiscal policy tools had to be used aggressively and innovatively to withstand the adverse impact of the crisis in 2020. In order to effectively design policy interventions to achieve the desired targets while accounting for potential trade-offs, an understanding of the interaction between monetary and fiscal policies becomes a prerequisite. The changing global and local economic conditions call for rigorous and continuous research on the topic to guide policy makers in navigating through the critical times ahead of the Egyptian economy and the whole world. Accordingly, the main objective of this paper is to study the interaction between monetary and fiscal policy and how effective they are in achieving economic stability in Egypt, i.e., maintaining price levels and GDP growth rate. The proposed paper employs a unified framework for modelling and exploring monetary and fiscal policy interaction and their expected transmission mechanisms in Egypt. The analysis also examines the effect of monetary and fiscal policy mix on Egypt macroeconomic stability via quantifying the impact of policy shocks on output and inflation. Analysis is conducted using Bayesian Vector Autoregression (BVAR) model covering a period of 16 years from 2005/2006 to 2021/2022 using quarterly data of six variables. Overnight lending rate is used as proxy for monetary policy stance, while real government spending and real tax revenues are used as proxies for fiscal policy stance. Growth in real GDP, change in Consumer Price Index (CPI) and real exchange rate are used as non-policy variables. Results are expected to capture response of policy variables to different policy shocks. Hence, characterising the nature of interaction between the two policies in the Egyptian economy in terms of fiscal vs. monetary dominance and substitutes vs.

The Impact of Financial Development on the Attractiveness of Foreign Direct Investment in the MENA Region

Ines Trojette
,
ESPI-Paris
Nestor Odjoumani
,
Paris Nanterre University

Abstract

his paper aims to investigate the impact of financial development on Foreign Direct Investment (FDI) inflows. The literature review related to this issue indicates ambiguous results depending on the heterogeneity of countries, the liberalization’s scale, and the development status. In this study, we use an annual panel data set of 10 MENA countries covering the period 1996-2020 (Algeria, Egypt, Iran, Israel, Jordan, Libanon, Malta, Morocco, Oman and Tunisia).

The empirical approach is based on the theoretical framework of Noy and Vu (2007) and Okada (2013). The equation can be written as:
FDI_(it)=?_1+ ?_2 ?INFRA?_it+?_3 ?CREATION?_it+?_4 ?HK?_it+?_5 ?TRADE?_it+?_6 ?INST?_it+?_7 ?FD?_it+?_8 ?INFL?_it+?_9 ?Nat_Resr?_it +?_10 ?Exchange_rate?_it +?_it

FDI_(i)is the net inflows of Foreign Direct Investment as a percentage of GDP. As independent variables, we include, infrastructure (INFRA), technology creation (CREATION), human capital (HK), trade openness (TRADE), institution (INST), financial development (FD) (credit to the private sector, liquid liabilities, bank assets, stock market capitalization, traded value, turnover ratio), inflation (INFL), natural resources (NAT_Resr), exchange rate (Exchange_Rate). The inflation rate is included because it may cause distortions in decision-making regarding nominal magnitudes.
In our study we use the system GMM approach. This method produces more efficient and precise estimates compared to difference GMM by reducing the finite sample bias (Baltagi, 2008). It is an appropriate method to tackle the problem of endogeneity of financial development (FD) and institutional (INST) variables. The literature has identified the variable legal origin as an instrument of financial development (Levine et al., 2000). However, as it describes the type of law applied in the country for example common or civil law, this variable doesn’t vary over time. Then it cannot be used as an instrument of financial development in the panel analysis (Eggoh & Villieu, 2013). In this case we instrument financial development following the method of Lewbel

What Drives the Banking Liquidity: Evidence from Morocco

Imad El Hamma
,
Mohammed V University-Rabat

Abstract

This article analyses the factors drive the banking liquidity hold by the Moroccan commercial
banks. We study bank specific and macroeconomic data over the period 2003-2009 and we
analyze them with the technique of the instrumental variables.

Discussant(s)
Mouchera Karara
,
Sovereign Fund of Egypt
Ines Trojette
,
ESPI-Paris
Imad El Hamma
,
Mohammed V University-Rabat
JEL Classifications
  • E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit