Using the ARDL Bound Testing Approach to Study the Inflation Rate in Egypt

Abstract

According to economic theory, the change in any economic variables may affect another economic variable through the time and these changes are not instantaneously, but also over future periods. The Autoregressive distributed lag (ARDL) model has been used for decades to study the relationship between variables using a single equation time series. The ARDL model is one of the most general dynamic unrestricted models in econometric literature. In this model, the dependent variable is expressed by the lag and current values of independent variables and its own lag value.\n\nThe paper studies the dynamic causal relationships between inflation rate, foreign exchange rate, money supply, and gross domestic product (GDP) in Egypt during the period 2005: Q1 to 2018: Q2. Using the bounds testing approach to cointegration and error correction model, developed within an ARDL model, we investigate whether a long-run equilibrium relationship exists between the inflation rate and three determinants (foreign exchange rate, money supply, and GDP). The results indicate that the exchange rate and the growth in money supply have significant effects on the inflation rate in Egypt, while the real GDP has no significance effect on the inflation rate.

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