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Monetary policy inertia: case of Jordan

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  • Osama D. Sweidan
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    Abstract

    Purpose – The purpose of this paper is to examine the inertia of monetary policy in the Jordanian economy, in which the monetary policy is neutral owing to the adoption of a fixed exchange rate with the US dollar. The question of the current paper is: Does monetary policy inertia exist in such an economy despite the fact that the exchange rate is pegged to a foreign currency? Design/methodology/approach – To test the hypothesis of the current paper in Jordan, the Taylor rule, adjusted to be consistent with the context of monetary policy in Jordan, is estimated. Moreover, the model is estimated by two techniques: OLS and the Kalman filter, using quarterly data over the period (1994:1-2007:1). Findings – The empirical evidence from the Jordanian economy shows that monetary policy inertia is highly significant in Jordan. The coefficient of the lagged interest rate is estimated to lie between 0.60 and 0.69. Moreover, the evidence illustrates that both inflation rate and output gap have an insignificant effect on setting the policy rate. Further, the policy interest rate seems to be set gradually in reaction to monetary policy inertia, unobserved variable and foreign interest rate. Originality/value – The paper investigates monetary policy inertia in a developing country whose economy is small, widely open and has a fixed exchange rate with the US dollar.

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    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal Journal of Economic Studies.

    Volume (Year): 38 (2011)
    Issue (Month): 2 (May)
    Pages: 144-155

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    Handle: RePEc:eme:jespps:v:38:y:2011:i:2:p:144-155

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    Related research

    Keywords: Developing countries; Interest rates; Jordan; Monetary policy;

    References

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    1. George B. Tawadros, 2007. "Testing the hypothesis of long-run money neutrality in the Middle East," Journal of Economic Studies, Emerald Group Publishing, vol. 34(1), pages 13-28, January.
    2. Richard Clarida & Jordi Gali & Mark Gertler, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," NBER Working Papers 6442, National Bureau of Economic Research, Inc.
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    13. Mankiw, N Gregory & Miron, Jeffrey A, 1986. "The Changing Behavior of the Term Structure of Interest Rates," The Quarterly Journal of Economics, MIT Press, vol. 101(2), pages 211-28, May.
    14. Su Zhou, 2007. "The dynamic relationship between the federal funds rate and the Eurodollar rates under interest-rate targeting," Journal of Economic Studies, Emerald Group Publishing, vol. 34(2), pages 90-102, May.
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