The nature of the relationship between the money supply and inflation in the Jordanian economy (1980–2019)
-
DOIhttp://dx.doi.org/10.21511/bbs.16(2).2021.04
-
Article InfoVolume 16 2021 , Issue #2, pp. 38-46
- Cited by
- 987 Views
-
740 Downloads
This work is licensed under a
Creative Commons Attribution 4.0 International License
This study aims to investigate the relationship between the money supply (M1) and inflation in the Jordanian economy during the period of 1980–2019.
To achieve the goal of the study, the methodology of econometric analysis of time series was used through the following tests: Augmented Dickey-Fuller (ADF) test – to test the stability of the study variables, Johansen’s Cointegration Approach – to determine the long-term equilibrium relationship between the study variables, and the Granger Causality Test – to determine the direction of the causal relationship if it exists in the short term.
The study results demonstrate that inflation has stabilized at the level, while the money supply M1 was unstable at the level and stabilized after taking the first difference. The Cointegration test results indicated that there was no causal link between the money supply M1 and inflation in the long term. Finally, the results of Granger Causality presented a unidirectional causality running from the money supply M1 to inflation in the short term, meaning that money supply causes inflation, not vice versa; this means that the money supply M1 can explain the changes that occur in the consumer price index (CPI) in the Jordanian economy.
The study recommends that the monetary authority in Jordan should have greater control over the money supply due to its impact on the stability of the general level of prices, in order to avoid a repeat of the 1989 crisis represented by the sharp decline of the dinar exchange rate against other currencies and an increase in inflation that year to 25.6%.
- Keywords
-
JEL Classification (Paper profile tab)E31, E51
-
References34
-
Tables5
-
Figures0
-
- Table 1. Money supply M1 and consumer price index (CPI) (1980–2019) in Jordan, million JD
- Table 2. Average growth of the study variables divided into four periods
- Table 3. ADF results for stationarity
- Table 4. Johansen cointegration test results
- Table 5. Granger causality test result
-
- AlNaif, K., Shahtite, M., & AlTaib, S. (2018). The relationship between money supply and inflation in the Jordanian Economy. IUG Journal of Economics and Business, 26(1), 64.
- Al-Zararee, A. N., & Batarseh, A. (2019). The impact of external factors on the monetary stability in Jordan for the period 1990–2015. Banks and Bank Systems,14(1), 29-41.
- Amassoma, D., Sunday, K., & Onyedikachi, E.-E. (2018). The influence of money supply on inflation in Nigeria. Journal of Economic and Management, 31(1), 5-23.
- Awad, T. (1995). Efficiency of monetary and fiscal policy in Jordan (1978–1992). Journal of Human Sciences Studies, 31(2), 394-405.
- Batarseh, A. (2017). The prospects for the economy and industrialization in Jordan (1st ed.) (220 p.). Philadelphia University, Center for Future Studies.
- Benbouzian, M, & Benamar, A. (2004). The relationship between money and prices in the Maghreb countries: A Cointegration analysis (MPRA Paper).
- Central Bank of Jordan (CBJ). (2015). The impact of low oil prices on the national economy (Research and Working Paper).
- Central Bank of Jordan (CBJ). (2019). Fifty Sixth Annual Report 2019.
- Crowder, W. (1998). The long run link between money growth and inflation in the USA. Economic Inquiry, 36(2), 229-243.
- Dewett, K., & Chand, A. (1993). Economic theory (pp. 142-143). New Delhi: Shyama, Charitable Trust.
- Dickey, D., & Fuller, W. (1981). Likelihood Ratio Statistic for Autoregressive, Time Series with a unit root. Econometrica, 49(4), 1057-1072.
- Diermeier, M., & Goeke, H. (2019). Money supply and inflation in Europe: Is there still a connection? (IW Policy Paper No. 17/2016E).
- Doan Van, D. (2019). Money supply and inflation impact on economic growth. Journal of Financial Economic Policy, 12(1), 121-136.
- El-Isa, N. (2007). The effect of financial liberalization on monetary policy and the money multiplier. Al Njah University Journal, 21(1).
- Fisher, I. (1911). The purchasing power of money. Macmillan, New York.
- Fodeel, F., & Megalwi, A. (2010). The relative effectiveness of the Fiscal and Monetary Policy in the Jordanian Economic Activity (1980–2009). Economic Study Journal, 4(11), 120-136.
- Friedman, M., & Schwartz, A. (1963). A monetary History of the United State (1867–1960). Princeton University Press, USA.
- Froyen, R. T. (1990). Macroeconomics: Theories and Policies (3 rd. ed.) (pp. 70-71). Macmillan Publishing Company, New York.
- Ghazali, M. F., Amin, H., Muhammad, M. Z., & Samsu, S. H. (2009). Linkage between money and prices: A causality analysis for Malaysia. International Business Research, 1(4), 80-82.
- Granger, C. W. (1969). Investigating causal relations by econometric models and cross-spectral methods. Econometrica, 37(3), 424-238.
- Hicham, A. (2020) Money Supply, Inflation and Economic Growth: Co-Integration and Causality Analysis. Studia Universitatis Babes-Bolyai Oeconomica, 65(2), 29-45.
- Indalmanie, S. P. (2011). The relationship between money supply and the rate of inflation: Causality approach to study of the Jamaican Economy (1961–2006).
- Johansen, S., & Juselius, K. (1990). Maximum likelihood Estimation and Inference on CoIntegration – with applications to the demand for money. Oxford Bulletin of Economics and Statistics, 52(2), 169-2010.
- Kinganda, E. O. (2014). Relationship between inflation and money supply in Kenya. Journal of Social Economics, 2(2), 63-83.
- Lado, E. P. Z. (2015). Test of relationship between exchange rate and inflation in South Sudan: Granger-Causality Approach. Economics, 4(2), 34-40.
- Mackinnon, J. G. (1990). Critical Values for Cointegration Tests (Discussion Paper No. 90-4). University of California San Diego.
- MacKinnon, J. G., Haug, A. A.,k & Michelis, L. (1999). Numerical Distribution Functions of Likelihood Ratio Tests for Cointegration. Journal of Applied Econometrics, 14, 563-577.
- Mishal, Z. A., & Abu-Dallow, I. M. (2014). The effect of money supply on real output and prices in Jordan. Journal of the Jordanian Economic Science, 1(2), 173-192.
- Parkin, M. (2016). Macroeconomics (12th ed.) (238 p.). Pearson.
- Pinga, V. E. B., & Nelson, G. C. (2001). Money, Prices and Causality: Monetarist versus structuralist explanations, Using Pooled Country Evidence. Applied Economics, 33(10), 1271-1281.
- Sasongko, G., & Huruta, A. D. (2018). Monetary Policy and Causality between inflation and money supply in Indonesia. Business: Theory and Practice, 19, 80-87.
- Shadeed, M. (2018). Article about Keynesian monetary theory (pp. 1-10). University of Babylon, Faculty of Economics.
- Sultana, N., Koli, R., & Firoj, M. (2019). Causal relationship of money supply and inflation: A study of Bangladesh. Asian Economic and Financial Review, 9(1), 42-50.
- Yan-Liang, W. (2012). Relationship Research on Money supply, Economic growth, and Inflation. Journal of Convergence Information Technology, 7(11), 20-28.