Exchange Rate, Money Wages and Prices in Egypt (1991 – 2021)

Initial indicators from the Egyptian economy reveal that in recent years the Egyptian pound has suffered large and sudden devaluations. The main concern of this research is to empirically explore the extent to which the necessary conditions for successful devaluation are met and to investigate the overall final effect of changes in the exchange rate on money wages and domestic prices in Egypt. The main hypothesis we test is that, due the wage-price spiral in the Egyptian economy, devaluation has an overall negative effect on money wages (i.e., increasing in the money wage rate) and domestic prices (i.e., higher inflation rate).
The model we develop here is a simple two-equation model that expresses the simultaneous relationship between money wage rate and price level; using data from the Egyptian economy during the period 1991 – 2021

The Error Correction Model was found to be the most relevant model that suits Egyptian data; as it gives a good estimation of the coefficients of adjustment that show the deviation of the short-run relationship from the long-run relationship.

The results show that domestic price level in Egypt is, as expected by economic theory, positively rated to money wage rate, negatively related to real income and positively related import prices. Money wage rate is positively affected by domestic price level and productivity and not significantly affected by the rate of unemployment.