Exchange rate regimes and unemployment dynamics: empirical evidence from Egypt

Abstract

ABSTRACT This study examines the association between exchange rate dynamics and unemployment in Egypt using monthly data from January 1980 to December 2024 (540 observations). The unemployment rate is modelled as a bounded fractional outcome using beta regression (Ferrari and Cribari-Neto, 2004), which ensures functional-form consistency with the dependent variable's statistical properties. To address severe multicollinearity among macroeconomic regressors with variance inflation factors reaching 30.6 in the baseline principal component analysis is applied, and the resulting estimates are back-transformed to the original variable space. Heteroskedasticity- and autocorrelation-consistent (HAC) inference ensures robustness to serial dependence. The results show that exchange rate depreciation is robustly associated with lower unemployment (HAC coefficient = −0.080; p = 0.004), consistent with external competitiveness channels. Domestic macroeconomic variables do not exhibit stable direct associations under robust inference. The findings provide country-specific evidence on exchange rate–labour market linkages in an emerging economy characterised by repeated regime transitions.