The Money Demand Determinants in Jordan Using Co-Integration Model and Error Correction Model

Eid Ali Zyoud, Khaled Mohammed Sawai

Abstract


This paper investigates the narrow and broad money demand determinants in Jordan, and analyzes the appropriate money aggregate that could be used in designing the monetary policy among M1 and M2. A conventional money demand equation employed in this paper, where GDP, CPI, exchange rate and interest rate variables included to the models, however, quarterly data for the period 1992-med 2005 used to estimate Error Correction Model (ECM). We examined the existence of long run relationships among the variables, using two money aggregates M1 and M2.
The significance of the study in examining the impacts of the major developments and deregulations that took place in Jordan during 1990s on financial system, which aimed at liberalizing financial market, affected money demand behavior. The estimated model, using quarterly data, finds a stable long-run relationship among monetary aggregates, domestic prices, real income, and foreign interest rates. In addition, the error-correction model shows that changes in the inflation rate, the exchange rate, and foreign interest rates exert a significant impact on monetary aggregates.

Keywords


Demand for Money, Stationary, Cointegration, Error Correction Model, Open Economy.

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