The slowdown of the Egyptian economy over the last few years and the floatation of the pound in January 2003 stimulated a debate over the effectiveness of monetary policy in activating the economy. This paper contributes to this debate by focusing on monetary policy transmission mechanisms and addressing the following questions: Was there a bubble in the construction sector? How significant is the effect of interest rate on domestic credit to the private sector? Does a reduction in nominal interest rate cause international reserves to deteriorate? The paper concludes that there was a bubble in the construction sector; that nominal interest rate does not have a significant impact on real domestic credit going to the private sector; and that the relative importance of interest rate in explaining movements in international reserves is small compared to that of real domestic credit and real exchange rate.
Author(s): Mohamed Hassan