Write 2 paragraphs about "The Impact of Interest, Exchange, and Inflation Rates on the Efficiency of the Real Sector: Empirical Study of Egypt" article. 200 max word count, not formatting requirements. Abstract This study examined the effect of interest, exchange, and inflation rates on the performance of the real economy in Egypt through the period 2003-2018. The performance of the real sector is represented here by the efficiency of allocating and using resources in the different production processes, and the state of unemployment; moreover, the performance of the production function was examined on the aggregate and sectoral levels. Data Envelopment Analysis (DEA) techniques were used to determine the efficiency of the productive sectors and the aggregate production function. Then, Auto-Regressive Distributed Lag (ARDL) models were applied to determine the long-term effect of the variables in question on the efficiency of the production and the rates of unemployment. The study found that technological progress is the main catalyst for the efficiency of the productivity of the factors of production in the Egyptian economy. On the other side, the efficiency of determining the optimal mix of factors of production in the aggregate production function, scaling efficiency, is the main determinant of the technical efficiency of factors of production. On the sectoral level, the productive sectors were arranged according to the efficiency of factor productivity as follows: mining, agriculture, services, and African Journal of Business and Economic Research (AJBER) (Online) ISSN 1750-4562 (Print) ISSN 1750-4554 Indexed by SCOPUS, UGC CARE List, IBSS, EBSCO, ProQuest, ABDC, SAJE, COPERNICUS, CABELL, Sabinet and J-Gate Volume 17, (Issue 1), March 2022 Pp77 -99 The Impact of Interest, Exchange, and Inflation Rates on ... 78 manufacturing sector. The devaluation of the local currency negatively affects the level of technical progress while it positively supports the process of scaling the factors of production; however, the ultimate effect of local currency devaluation on total factor productivity is negative. This may be attributed to the increase in the cost of imported technology due to local currency devaluation. On the other hand, high-interest rates negatively affect the process of determining the optimal mix of different factors of production in the aggregate production function, which may be attributed to the deviation of the relative relationship between the factors of production and their prices. In general, strengthening the local currency exchange rate with low inflation and interest rates can support the efficiency of the real sector and allow the regulation of aggregate production function in a manner that efficiently minimizes the average cost of aggregate output. Keywords: Interest, Exchange, Inflation, Unemployment, Efficiency, Egypt. JEL: E23, E31, E52. 1. Introduction It can be said that monetary variables, such as interest and exchange rates, are linked in a self-generating circular relationship supported by inflation as an intermediate channel between the two variables, where the devaluation of the local currency stimulates an increase in the inflation rates (Ha et al. 2018) and, based on the Tylor rule, high inflation rates stimulate an increase in the nominal interest rates (Khumalo et. al, 2017; Davig and Leeper, 2007). High nominal interest rates increase the cost of financing the variable cost of production in the short-run, what is known as the working capital channel (Chowdhury et. al, 2004; Barth and Ramey, 2001; Christiano et. al, 1994). The effect of high-interest rates on production costs may be augmented through the material inputs assumption, which assumes that the output of one productive unit is the input of another one (Basu, 1994). The changes in different monetary variables can then affect the efficiency of allocating and using resources and create an output gap on the aggregate level. This means the efficiency of aggregate production could be a function of the high costs and the inflationary pressures generated by the monetary variables. Furthermore, the inflationary pressures may widen the output gap in the future, as inflation stimulates an increase in the price of the labor factor to adjust the nominal wages to the high price levels in a process known as wage indexation (Heinemann, 2003; Odusola and Akinlo, 2001). Ashraf Helmy (AJBER) Volume 17, Issue1, March 2022, Pp77- 99 79 The interaction between interest, exchange, and inflation rates affects the costs of different factors of production. This may affect the efficiency of allocating and using the available resources while determining and operating the production function, where factor price influences the efficiency of determining the optimal mix of different factors of production in the production function. Accordingly, inefficient monetary measures may lead to inefficiency in the real economy; moreover, the correction of this defect would become impossible as long as the inappropriate monetary measures remain. In this context, this study examined the effect of interest, exchange, and inflation rates on the efficiency of the production function, on both sectoral and aggregate levels and on the state of unemployment, to determine the ultimate effect of these variables on the real one in Egypt. The efficiency of production processes was represented by two efficiency indicators, total factor productivity (TFP) and technical efficiency. Figure (1) depicts the study layout and illustrates that the main purpose of the study is to determine the effects of interest, exchange, and inflation rates on the efficiency of production and the status of unemployment in Egypt from 2003 to 2018. The ultimate goal of the study is to test the hypothesis that the efficiency of the performance of the real economy in Egypt is attributed to changes in interest, exchange, and inflation rates. 2. Literature Review The literature review is divided into three sections. The first section introduces the theoretical foundation of production efficiency measures, the second section is devoted to the literature on the mutual relationship between monetary variables; and the third section is devoted to the literature on the impact of monetary variables on different aspects of the real economy. The efficiency indicator, total factor productivity (TFP), consists of two efficiency measures: technical efficiency and technical change. While technical efficiency is concerned with the efficiency of allocating and using the available resources under a given level of technology. Technical change concerns the ability to make technological progression by adopting an advanced level of technology. In other words, the technical efficiency measures how close the productive unit is relative to its production possibilities frontier, while the technical change measures the ability of the productive unit to shift its current production possibilities frontier outward. Technical efficiency consists of two efficiency measures: pure technical efficiency and scale efficiency. Pure technical efficiency is related to the managerial efficiency of allocating and using resources in a way that maximizes their levels of productivity, while scale efficiency is related to the ability to determine the optimal mixture of the available factors given their prices (costs) and productivity. (Coelli, 1996; Watkins et al. 2014; Abel and Bara, 2017; Taib et al. 2018). Many scholars have examined the mutual relationship between different monetary variables, especially the effect of exchange rate changes on the price level. en et al. (2019) conducted an Auto-regressive Distributed Lag (ARDL) test on data of five emerging market economies Brazil, India, Indonesia, South Africa, and Turkey to determine the long term interrelationship between inflation, interest rate, and exchange rate. The study found that the devaluation of the local currency stimulated an increase in the price level and the level of interest rate in the sample countries. Ha et al. (2018) argued that local currency devaluation not only stimulates high inflation rates in the short-run, it also stimulates real GDP growth, which may mitigate the negative impact of exchange rate devaluation on inflation rate in the long-run. Monfared and Akn (2017) used the Hendry modeling method and Vector Auto-regression (VAR) model to determine the effect of exchange rate volatility on inflation rates in Iran. They found that exchange rate devaluation is associated with an increase in price inflation. Hossain (2015) applied Granger- Ashraf Helmy (AJBER) Volume 17, Issue1, March 2022, Pp77- 99 81 causality and the structural vector autoregression analysis on consumer price index, interest rate, exchange rate, and real GDP data for 26 years in Bangladesh to examine the response of price level to different exchange rate regimes and the ultimate effect on real GDP growth. The study found that as long as the exchange rate regime is free and flexible as long as it is effective in maintaining price level stability and that the fixed exchange rate regime generates volatility in the money supply and negatively affects real GDP growth. Many studies support the argument that monetary policy shocks are transferred directly and/or indirectly to the real sector in the economy. However, some of these studies found these shocks had negative impacts, while others found they had differentiated impacts on the real sector. The short-run ARDL models applied by Hatmanu et al. (2020) to examine the effect of exchange rate and interest rate on the growth of real GDP in Romania through the period 2003-2019 found that exchange rate devaluation has positive impacts on economic growth while interest rate has a negative impact on economic growth. An applied study on the Eurozone by Murgia (2020) examined the effect of monetary shocks on industrial production and inflation using the narrative approach and found that the negative response of industrial production to monetary shocks is significantly greater than the negative response of inflation. Vo et al. (2019) used the GARCH model and Error Correction Model (ECM) to determine the effect of changes in exchange rates on the performance of manufacturing exports in Vietnam and concluded that fluctuations in exchange rates negatively affect the performance of manufacturing exports and discourage the economic growth process in the long-run. zer and Karagl (2018) studied the effect of monetary policy on economic growth in Turkey through the period 1998-2016 using Granger causality tests. They found that monetary policy affects the economic growth, but in the short-run. Low and Chan (2017) applied unit Root Test, Co-integration Test, Vector Error-Correction Modeling (VECM), Impulse Response Function (IRF), and Variance Decomposition to data on exchange rate, inflation rate, interest rate, and economic growth in Malaysia. They found that exchange rate positively impacts economic growth rate while both interest and inflation rates negatively affect economic growth rate. Bans Akutey et al. (2016) applied the Johansen test, the Vector Error Correction Model (VECM), and the Ordinary Least Squares (OLS) regression test to determine the effect of inflation on the productivity of the manufacturing sector in Ghana. They found that high inflation rates The Impact of Interest, Exchange, and Inflation Rates on ... 82 negatively affect the productivity in the manufacturing sector. Gadanecz and Mehrotra (2013) observed the changes in interest rate, exchange rate, and economic growth rate in selected emerging economies and argued that the floating exchange rate regime supports the productivity in the short-run. However, in the long run, the floating regime imposes contractionary pressures on the level of aggregate output. Lotfalipour (2013) used the panel data model to determine the effect of exchange rate fluctuations on investment and concluded that local currency devaluation negatively affects the incentive to invest and slows down economic growth rate. Prchniak and Witkowski (2012) applied the Bayesian model, pooling annual data to examine the effect of monetary variables on economic growth in 27 EU countries for the period 1993- 2010 and 15 EU countries for the period 1972-2010. They found differentiated effects of interest rate on economic growth through two intervals, where the effect was negative during the period 1993-2004, while it was positive during the period 2005-2010. Sek et al. (2012) applied the multivariate GARCH model to determine the relationship between exchange rate, inflation targeting regime, and the growth of real GDP in a sample of three developed and three developing economies. The study concluded that changes in exchange rate significantly affect both inflation and the growth of real GDP in the developed and developing economies in the sample. However, the response of inflation to inflation targeting regimes is more powerful in developing economies than in developed ones. Besides, there is a trade-off tendency between inflation and GDP growth in developed economies which is not observed in developing economies. Mallick and Sousa (2012) examined the effect of interest rate on real GDP in the BRICS countries and found that contractionary monetary policy had a negative impact on real GDP. Sattarov (2011) argued that up to a certain inflation rate, 4% or less, inflation stimulates economic growth. However, once the rate exceeds that range, inflation tends to harm economic growth rate in the long run. Doruel et al. (2010) utilized input-output tables to determine the effects of exchange rates changes on the production costs and the competitiveness of the manufacturing sector in Turkey and concluded that the devaluation of the local currency increases production costs and decreases competitiveness of products, especially those with a high content of imported inputs. Odusola and Akinlo (2001) applied the Vector Auto-regression (VAR) model to determine the effect of local currency devaluation on the levels of inflation and output in Nigeria. Although the study confirmed the negative impact of local currency Ashraf Helmy (AJBER) Volume 17, Issue1, March 2022, Pp77- 99 83 devaluation at the price level, the effect of exchange rate changes on the economy varies in the short-run from the long run. Exchange rate devaluation stimulates output growth in the medium and long term. However, it discourages output growth in the short-term. Hunt et al. (1998) argued that inflation may positively encourage the potential of growth and that targeting domestic prices may have a contractionary effect on the potential growth, where targeting domestic prices shifts the efficient output frontier inward. What is new with this study? This study examined the changes in total factor productivity and technical efficiency of the production function on the sectoral and the aggregate level. It tried to determine the effect of interest rates, exchange rates, and inflation rates on these measures of efficiency and the state of unemployment to estimate the long-run effect of the variables in question on the efficiency of the real sector. . Results and Discussion 4.1. The Analysis of Productivity on Aggregate and Sectoral Levels The outcomes of the DEAP software based on the output-oriented Malmquist productivity approach applied on panel data on aggregate output, the number of labor factor, and the amount of capital on the aggregate and sectoral levels were analyzed and depicted in Figures (2), (3), and (4). Panel (a) in Figure (2) illustrates the development of total factor productivity associated with the processing of the aggregate production function through the period 2003-2018. The development of total factor productivity showed massive changes during the considered period, where the arithmetic means of the changes in total factor productivity recorded 1.07 points, with a standard deviation of 0.22 points. The fluctuations of the total factor productivity were attributed to changes in the technical efficiency of labor and capital factors and the adopted technological methods, review the theoretical foundation section. The average points of the technical efficiency and technical changes were recorded 1.02 and 1.08, with standard deviations of 0.18 and 0.27 points, respectively, during the considered period. Panel (b) illustrates the development of the total factor productivity indicator and its two components through the sub-periods 2003-2010 and 2011-2018. Despite the improved scaling and managerial efficiency of allocating and using resources in the two sub-periods, the total factor productivity retreated thanks to the retreatment of the technological progress. 5. Concluding Remarks and Recommendations The study found that technological progress is the main catalyst of output efficiency of the factors of production in the Egyptian economy. On the other side, efficient determination of the optimal mix of factors of production in the aggregate production function, scaling efficiency, is the main determining of the technical efficiency of factors of production. On the sectoral level, the productive sectors were arranged according to factor productivity efficiency as follows: mining, agriculture, services, and manufacturing sector. The devaluation of the local currency negatively affects the level of technical progress while it positively supports the process of scaling the The Impact of Interest, Exchange, and Inflation Rates on ... 90 factors of production. However, the ultimate effect of local currency devaluation on total factor productivity is negative. This may be attributed to the increase in the cost of imported technology due to local currency devaluation. On the other hand, high-interest rates negatively affect the process of determining the optimal mix of different factors of production in the aggregate production function, which may be attributed to the deviation of the relative relationship between factors productivity and their prices. Finally, the devaluation of local negatively affects the status of employment while high rates of inflation decrease the rate of unemployment in Egypt