Smoothing Egyptian Households' Consumption: The~Role of Credit Channel

Abstract

This study examines whether Egyptian consumers can smooth their consumption and the role of credit markets in this regard. This is in addition to examining the effect of the credit constraints in transmitting the monetary policy decisions to the households' consumption through its credit channel. To this end, the study utilizes a Vector Autoregressive model (VAR) to examine whether the monetary policy affects consumption through its credit channel. Then, an Autoregressive Distributed Lag (ARDL) Bound test to Cointegration is used to determine the effect of the credit constraints, represented by the external finance premium, in the long run. Consumption smoothing is separately tested using an Error Correction Model (ECM) besides a VAR one. The study uses quarterly data covering the period from the first quarter of 2002 till the fourth quarter of 2017. Results reveal that the EFP negatively affects consumption in the short and long run. Egyptian consumers are not able to smooth their consumption and the existence of credit constraints is most likely to be the reason for that. Finally, the analysis shows that the credit channel transmits the monetary policy decisions to the consumption of the households sector in Egypt.