Can increasing interest rates manage inflation in Egypt without triggering a recession? New insights from Structural Equation Modeling (SEM)

نوع المستند : المقالة الأصلية

المؤلفون

1 کلية التجارة جامعة طنطا مصر

2 Professor of Economics in Department of Economics and Public Finance, Faculty of Commerce, Tanta University

3 Lecturer of Management in Department of Management, Faculty of Commerce, Tanta University

المستخلص

This study sought to determine whether raising interest rates can effectively address the inflation problem in Egypt without causing a recession. This was done using structural equation modeling (SEM) over the period (1991-2024) to evaluate the direct and indirect effects of monetary policy on inflation and economic growth. The results showed that a 1% increase in the interest rate on deposits at central banks leads to an increase in lending rates by 0.73%, liquidity by 16.4%, and asset prices by 11.7%, but reduces private sector credit by -0.98%. Higher lending rates significantly reduce inflation by -3.4%, supporting the Keynesian theory, while higher asset prices slightly boost inflation by 0.045%. Asset prices and private credit positively affect GDP growth. The model demonstrates strong explanatory power (R² = 0.983), which confirms the effectiveness of raising interest rates in curbing inflation but highlights the need to set criteria to avoid deflation. Excessive credit, this study attempts to clarify a vision for achieving a balance between controlling inflation and growth through targeted monetary measures.

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