Working Paper: NBER ID: w0776
Authors: Jorge Braga de Macedo
Abstract: The paper presents a dynamic portfolio model under currency inconvertibility which rationalizes the recent Egyptian experience of real exchange rate appreciation and currency diversification following the increase in oil exports and the partial financial liberalization that took place after 1976. The two shocks are linked because the relative price of manufacturing exports in terms of oil is also the premium of the black market rate over the official exchange rate. The effects of various official exchange rate policies on the temporary equilibrium values of the premium and the real wage and on the steady-state values of asset stocks are examined. A review of the Egyptian experience shows that as the model suggests the official devaluation of 1979 was ineffective against the "Egyptian disease" so that little can be expected from the 1981 devaluation. In light of the model results, a crawling peg policy is proposed instead.
Keywords: currency diversification; export competitiveness; Egyptian disease; real exchange rate; oil exports
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increase in oil exports (Q37) | real exchange rate appreciation (F31) |
| real exchange rate appreciation (F31) | currency composition of financial wealth (G15) |
| official devaluation of 1979 (F31) | ineffective in restoring competitiveness (L49) |
| real exchange rate appreciation (F31) | capital outflows (F32) |
| real exchange rate appreciation (F31) | increased foreign currency holdings by domestic residents (F31) |
| crawling peg policy (E64) | stabilize the economy (E63) |
| exchange rate policies (F31) | asset stocks (G12) |
| black market rate premium over official rate (F31) | export incentives (F14) |
| black market rate premium over official rate (F31) | domestic currency demand (E41) |