The Effect of Real Exchange Rate on Unemployment Evidence from Egypt

Abstract

This paper aims to investigate the effect of real exchange rate on unemployment in the Egyptian economy during the period 1985-2015. There are three channels of effect real exchange rate on unemployment; these channels are macroeconomic channel, development channel, and labor intensity channel. We used three methods to estimate this relationship. They are Autoregressive Distributed Lag Model (ARDL), Fully Modified OLS (FMOLS), and Dynamic OLS (DOLS). The results reveal that real exchange has a positive and significant effect on unemployment. There is no significant effect of economic openness on unemployment. Furthermore, the correlation between unemployment and the growth is negative and significant. Also, the effect of labor productivity on unemployment was positive and significant. We can conclude the depreciation the real exchange rate will decrease the unemployment.