The Relationship between Financial Development and Inflation Rate in Egypt

Abstract

This study aims to investigate the relationship between financial development and inflation in Egypt during the period 1980-2018. The study employs various econometric techniques, such as Johansen's test for co-integration, error correction model, Granger's causality test, Toda-Yamamoto causality test, and dynamic ordinary least squares model. The findings indicate that financial development has not played a significant role in reducing inflation in Egypt over the studied period. Additionally, inflation has been found to be an obstacle to financial development in the country. The results also suggest the presence of a long-term equilibrium relationship between financial development and inflation, which is unidirectional and runs from inflation to financial development. Furthermore, the study finds that the inflation rate, economic growth, exchange rate, and trade openness jointly impact financial development in both the short and long term. This implies that the past values of these variables can be used to predict the current and future values of financial development. However, it is not possible to use the financial development index to predict the inflation rate in Egypt in the short and long term.