Abstract
The relationship between gross domestic product growth, money supply, and prices was not important for the formulation of monetary policy in Jordan. Taking into account the importance of these three variables, we analyzed the short run relationship between money, the price, and the gross domestic product (GDP) growth for the Jordanian economy. Time series methods were used for the annual data for the period 1976-2009. The results indicate that there is not an existing short-term relationship between money supply (M1) and GDP growth in Jordan. However, the monetary policy has not had any impact on the Jordanian macroeconomic variables, while it found out that there is a causal relationship from money supply to inflation, with low degree of (0.21).
Highlights
Monetary policy plays an important role in the economic growth of the country
The results of the unit-root tests are reported in Table 1 which indicated that the gross domestic product growth, money supply, and prices are I(1)
The results indicate a non-presence of a long-run relationship between the three variables
Summary
The relationship between money supply, income, and prices is still a controversial issue between the Keynesians and Monetarists. The Keynesians emphasize that a change in income cause changes in money stocks through the demand for money, which means that there exists a unidirectional causality from income to money without any feedback. The Monetarists, on the other hand, claim that money plays an significant role, and consider money supply to be the main factor leading to changes in income and prices. The direction of causation runs from money to income and prices without any feedback (Shams, 2012). The causal relationship between money, price, and output has been investigated by different researchers especially after the seminal paper by Sims (1972). The empirical studies have provided conflicting evidence on this issue, such as: Miller (1991), Friedman and Kuttner (1992), Jamie Emerson (2005), Herwartz and Reimers (2006), Saatcioglu and Korap (2008), Barth and Bannett (1974), Lee and Li (1983), Jarrah (1996), Gilman and Nakov (2004)
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