Abstract

This paper assesses Egypt’s debt sustainability using the fiscal reaction function approach, which tests whether the government responds (or not) to debt accumulation with adequate policy reactions to mitigate any kind of shocks. Both econometric models, the Autoregressive distributed lag (ARDL) and the Vector auto regression (VAR), are applied to test for Egypt’s fiscal reaction function. The results of both models show that Egypt’s debt can be sustainable under the period of study since the primary deficit responds negatively to the increase of the debt-to-GDP, implying that there’s fiscal response by the fiscal authorities in Egypt. The GDP growth also shows a statistically significant impact on reducing the primary deficit through both model results. On the other hand, the ARDL results show that an exchange rate depreciation prompts fiscal adjustment possibly to contain the inflationary effects of the devaluation. According to the Bounds and Johansen tests, the results confirm that there’s co-integration among the variables, implying that the series exhibit a long-term equilibrium relation, but with quite a slow rate of mean reversion to equilibrium. The results also reveal that the business cycle is a key long-run determinant of the fiscal stance in Egypt. Following a counter-cyclical fiscal policy, the government seeks fiscal consolidation during boom times and fiscal outlays during recession times.

Department

Economics Department

Degree Name

MA in Economics

Graduation Date

Fall 9-19-2020

Submission Date

September 2020

First Advisor

Noureldin, Diaa

Second Advisor

NA

Third Advisor

NA

Committee Member 1

Bouaddi, Mohammed

Committee Member 2

Zaki, Chahir

Committee Member 3

NA

Extent

50 p.

Document Type

Master's Thesis

Library of Congress Subject Heading 1

Economics

Rights

The author retains all rights with regard to copyright. The author certifies that written permission from the owner(s) of third-party copyrighted matter included in the thesis, dissertation, paper, or record of study has been obtained. The author further certifies that IRB approval has been obtained for this thesis, or that IRB approval is not necessary for this thesis. Insofar as this thesis, dissertation, paper, or record of study is an educational record as defined in the Family Educational Rights and Privacy Act (FERPA) (20 USC 1232g), the author has granted consent to disclosure of it to anyone who requests a copy. The author has granted the American University in Cairo or its agents a non-exclusive license to archive this thesis, dissertation, paper, or record of study, and to make it accessible, in whole or in part, in all forms of media, now or hereafter known.

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