Short-run energy-economy interactions in Egypt

Abstract

This paper discusses the short-run adjustment mechanism of the Egyptian economy to changes in the domestic price of oil. The effects of oil price increases have been analysed in the framework of a short-run macroeconomic model with an explicit treatment of energy. The results suggest that a reduction in petroleum use induced by a rise in the price of oil will impose difficult adjustment problems for the economy in the short run in terms of increase in inflation, fall in the share of wage income and sharp output losses. The analysis also indicates that energy demand management through appropriate petroleum pricing strategy cannot bring about desirable impacts on the economy unless efforts are made to reduce cost pressures originating from other energy sectors.