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Effectiveness of Monetary Policy Instruments on Economic Growth in Jordan Using Vector Error Correction Model

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  • Rami Obeid
  • Bassam Awad

Abstract

The global financial crisis emphasized the important role of the prudent monetary policy in supporting economic growth through maintaining price stability. The monetary policy operational framework that was designed in 2008 was updated to include more instruments for managing monetary policy learning from the crisis lessons. Several studies analyzed various dimensions related to economic growth in Jordan such as Abdul-Khaliq, Soufan, and Abu Shihab (2013) and Assaf (2014), there were no studies that investigated the effect of monetary policy on economic growth in Jordan, at least recently, however. The study aims at measuring the effect of monetary policy instruments on the performance of Jordanian economy. Using quarterly data covering the period (2005-2015), an econometric model was examined using Vector Error Correction Model to assess the impact of monetary policy instruments on economic growth. The foremost advantage of VECM is that it has a nice interpretation of long-term and short-term equations. The results showed the existence of positive long-term and short-term effects of monetary policy instruments on the growth of real GDP. The model included three monetary policy instruments besides money supply. They are required reserve ratio, rediscount rate and overnight interbank loan rates as dependent variables, and the real GDP growth as a dependent variable. The stationarity of the model time series was addressed. In addition, the stability of the model was tested using stability diagnostics tools. The results showed also an existence of inverse relationship between rediscount rate and economic growth in Jordan over both long and short terms.

Suggested Citation

  • Rami Obeid & Bassam Awad, 2017. "Effectiveness of Monetary Policy Instruments on Economic Growth in Jordan Using Vector Error Correction Model," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 9(11), pages 194-206, November.
    • Handle: RePEc:ibn:ijefaa:v:9:y:2017:i:11:p:194-206
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    Cited by:

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    2. Rami Obeid, 2023. "The Impact of Market Power, Credit Risk, and Economic Environment on the Stability of the Arab Banking Sector," International Business Research, Canadian Center of Science and Education, vol. 16(10), pages 1-1, October.
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    4. Abille, Adamu Braimah & Mpuure, Desmond Mbe-Nyire, 2020. "Effect of Monetary Policy on Economic Growth in Ghana," Asian Journal of Applied Economics, Kasetsart University, Center for Applied Economics Research, vol. 27(2).

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    More about this item

    Keywords

    monetary policy instruments; vector error correction model; economic growth; money supply; Jordan;
    All these keywords.

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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