An Economic Econometric Simultaneous Model for Inflation and Unemployment as a Major Problem in the Egyptian Economy

Abstract

Egyptian economy has witnessed huge economic changes since the revolution of 2011. These appear in deficit of balance of payment and deficit of governmental budget, low performance of economic sectors accompanied with annual increase of both inflation and unemployment rates. Inflation rate reached 9.7%, meanwhile unemployment rate was 10.9% on average of time period 2004-2015. The impact was the continuous decline of real per capita income, increased costs of living, and poor social justice for Egyptian people. Main objective of present research is to study the interrelation between inflation and unemployment rates to investigate its impact and its forecast. This can serve suggesting alternative policy options for reducing its negative impacts on Egyptian people and economy. Major findings are summarized as follows: An inverse relationship was statistically proved between both inflation and unemployment rates during 2004 and 2012 matching with Phillip's finding. * The Egyptian-January, 2011 revolution has negatively affected unemployment rate, which has been increased to reach 12.9% during the period 2011-2015. The results gained from the simultaneous model that has been developed to investigate the interrelationship between inflation and unemployment showed a supply-inflation due to unbalanced production capacities and available resources. Meanwhile, the increasing demand for consumption goods due to increased population growth has led to increasing inflation rate. unemployment and inflation have become progressively one of the major problems facing Egypt. With the spread of the financial crisis that started in the United States of America and transferred into the real economy worldwide, the economic growth decreased, which has led to a high rate of unemployment. Economic stagnation after January 2011 led to an increase in the number of unemployed to 23 million. On the other hand, inflation phenomenon has shown remarkable changes since the mid-eighties. The trade-off between inflation and unemployment has become one of the most important tools that central bank of Egypt takes into account when designing and implementing the monetary policy. Therefore, Phillips curve implies significant implications for policy makers. One of the major objectives of central bank in Egypt is to stabilize prices through controlling inflation. However, if there is a negative relationship between inflation and unemployment, the central bank can keep low inflation rates, but this implies consequently to accept high rates of unemployment.