An empirical investigation of the IMF approach towards macroeconomic adjustment in Egypt
This thesis examines the IMF approach to macroeconomic adjustment in Egypt with, firstly, an empirical assessment of the analytical foundations of this approach and, secondly, the construction and estimation of a small macroeconomic model of the Egyptian economy over the period 1952-86. Following an overall appraisal of Egyptian macroeconomic performance, with and without the application of Fund financial-supported adjustment programmes (conditionality), the main part of the thesis provides empirical evidence on the determinants of aggregate foreign trade, money supply and money demand and inflation. Examination of determinants of foreign trade shows that demand for exports is price-elastic, while demand for imports is income-elastic. However, it appears that Egypt's export supply is constrained by capacity. Consequently, devaluation may not play a substantial role towards improving the trade account. Study of the monetary sector reveals that the money supply is best regarded as endogenous, contrary to the assumption made in the Fund approach. Assuming an endogenous money supply, both stock adjustment-expectations and error correction models of money demand behaviour reveal a well-fitting function. The IMF view of inflation in LDCs is that it is essentially a monetary phenomenon, i.e. caused by an excess supply of money. Evidence is provided to show that, in addition to money supply growth, structural bottlenecks and expectations are also influential in the inflation process in Egypt and the basic IMF view of inflation should be modified accordingly. Finally, in order to explain changes in income, prices and balance of payments in Egypt, a small aggregate macroeconomic model is constructed and estimated. Unlike the conventional IMF model, real output is not taken to be predetermined. Estimates of the structural parameters as well as model simulations suggest that the model performs well in tracking the historical values of the dependent variables.