Structural breaks and monetary dynamics: A time series analysis

This article investigates the stability of money demand and implications for the conduct of monetary policy in Egypt. The econometric procedures include testing for structural breaks at unknown dates and conditioning on the most recent break for estimation and forecasting. Test results provide evidence for regime shifts and lend support to the use of short-term interest rate as the main policy instrument. Sources of structural change are detected by a state-space model. Also, using a structural vector autoregressive (VAR) model for short-run dynamics, it is found that narrow money is a more appropriate monetary aggregate for policy analysis.