The Impact of Fiscal Deficit on Monetary Policy In Egypt: ARDL Model Study

Document Type : Original Article

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Associate Professor, Department of Public ,Financial Economics, Faculty of Commerce, Tanta University, Arab Republic of Egypt

Abstract

This research aims to examine the influence of some economic factors on the Central Bank's decision to formulate monetary policy in Egypt. The research examines the impact of fiscal deficit, inflation rate, real output and exchange rate on interest rate, as a monetary policy variable, in Egypt using the ARDL model over the period (1990 - 2024). The results conclude that the fiscal deficit has a negative and significant impact on interest rate in Egypt in the long run, which is associated with fiscal theory. Therefore, the results support the impact of fiscal policy on monetary policy. The study also concludes that both inflation rate and the US dollar exchange rate have a positive and effective impact on interest rate in the short and long terms, which is consistent with the Taylor rule in the open economy. Moreover, the results demonstrate the positive and significant impact of real output on interest rate in the short term that is consistent with the Taylor rule. Therefore, the coordination between fiscal and monetary policies tools is necessary to reduce the fiscal deficit, achieve the targeted inflation rate, achieve the targeted growth rate, and achieve exchange rate stability, which maintain interest rate stability, achieve the effectiveness of monetary policy and stabilize financial institutions in Egypt.

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