In addition to conventional sources of increased costs of government intervention, the declining popularity of Egypt's domestic debt might raise short-term interest rates and increase the cost of servicing newly issued debt. This has the potential of increasing the fiscal burden and undermining the credibility of the current fixed exchange rate regime.
Since Egypt's government introduced an economic reform and structural adjustment program in 1991, Egypt's Central Bank has been engaged in massive sterilized interventions to support the fixed nominal exchange rate regime.
The result of this process, however, has been an increasing fiscal burden, expressed in the volume of outstanding treasury bills and the interest payments on the stock of outstanding debt.
Al-Mashat and Grigorian present evidence of this and point out new channels for increased costs through further sterilization. In addition to conventional sources of increased costs, such as differentials between foreign and domestic real interest rates, the declining popularity of domestic debt might increase the short-term interest rate, thus increasing the cost of servicing newly issued debt.
The authors examine the possibility of an increased debt burden because of attempts to roll over outstanding debt and extend its maturity.
The authors explore the importance of measures involving interest rates in light of recent literature on balance of payments crises. They also explain the rationale behind the empirical assessment of the interest (inflation) rate sensitivity of monetary aggregates.
Finally, they offer estimates of an aggregate money demand equation by introducing the contract-intensive money ratio as a measure of financial innovation.
This paper—a joint product of the Private and Financial Sectors Development Unit, Europe and Central Asia Region, and the University of Maryland- is part of a larger effort to study monetary and financial sector reforms in emerging markets. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Shirley Dy, room H6-372, telephone 202-473-2544, fax 202-522-0073, Internet address sdy@worldbank.org. The authors may be contacted at almashat@econ.umd.edu or dgrigorian@worldbank.org. (21 pages)
Hardcopies of this paper are available via e-mail.