The Welfare Effects of a Large Depreciation : The Case of Egypt, 2000-05

Abstract

The Egyptian pound depreciated sharply between 2000 and 2005, declining by 26 percent in nominal trade-weighted terms. The author investigates the effect of the large depreciation on household welfare operating through exchange rate-induced changes in consumer prices. He estimates exchange rate pass-through regressions using disaggregated monthly consumer price indices to isolate the impact of the exchange rate changes on consumer prices. Then he uses household-level data from the 2000 and 2005 Egyptian household surveys to quantify the welfare effects of these consumer price changes at the household level. The average welfare loss due to exchange rate-induced price increases was equivalent to 7.4 percent of initial expenditure. Stronger estimated exchange rate pass-through for food items imply that this effect disproportionately affected poorer households.