Determinants of the Demand for and Supply of Money in Jordan: 1967-1980
Shehadeh, Ali Qandil
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https://hdl.handle.net/2142/70726
Description
Title
Determinants of the Demand for and Supply of Money in Jordan: 1967-1980
Author(s)
Shehadeh, Ali Qandil
Issue Date
1982
Department of Study
Economics
Discipline
Economics
Degree Granting Institution
University of Illinois at Urbana-Champaign
Degree Name
Ph.D.
Degree Level
Dissertation
Keyword(s)
Economics, Finance
Abstract
Study Objective. This study intends to formulate and test empirically the behavioral relations governing the demand and supply of money in Jordan. Without substantial modifications, the conventional tools of analysis used in the developed world might not be readily applicable for the Jordan case. This is simply due to the fact that the Jordanian financial and monetary systems are far less complicated than those of developed economies. Two of the powerful tools of conventional central banking are in their early stages of development in Jordan, namely, open market operations and the discount window. Evidently, such a situation will constrain our ability to formulate a reasonable money supply relationship based on free reserves.
Considering the various aspects governing the Jordan economic life, the demand and supply of money relationships were formulated and tested using ordinary least squares (OLS). Recognizing the simultaneity in the determination of both the interest rate and the stock of money, and in order to overcome the least squares bias, the techniques of two-stage least squares (2SLS) and the three-stage least squares (3SLS) were utilized.
Results and Recommendations. The OLS regression results suggest that the specification of both money relationships in nominal terms is superior to the real or logarithmic specification. The 2SLS and 3SLS approaches did not significantly improve upon OLS estimates. Income and the political events in the Middle East region are the main determinants of the demand for nominal balances in Jordan. The actual rate of inflation and the rate of interest were less significant.
Net foreign assets, local assets of the Central Bank of Jordan (CBJ), and the rate of interest are the major determinants of the money stock. The currency to deposits ratio, the government budget deficit, and national exports were less significant.
Interest responsiveness of the money supply suggests that both fiscal and monetary policy are important in the determination of equilibrium income in Jordan. Policies of the CBJ, commercial banks, the Treasury, and the private sector preferences contribute to money stock determination. Jordan's ability to control its money stock is also influenced by the degree of stability of the sources of foreign aid.
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