Abstract
This study aimed to analyze the effects of fiscal and monetary policies interactions on public debt in Jordan during (1970 – 2019). Using Vector Error Correction Model (VECM) derived from VAR (Vector Auto regression), and examine dynamic interactions between economic variables over time, by Appling Impulse Response Function, and Variance Decomposition. The results indicated that the fiscal policy instruments affect public debt in two different directions, the expansion of government expenditure positively affect public debt, while tax revenues reduce indebtedness. The monetary policy instruments affect public debt in the same directions, as the results indicated that the central bank in controlling money supply and managing interest rate helps the fiscal authority in reducing the public debt in Jordan. The results confirm the strongest impact of government expenditure on public debt in Jordan. The study recommends the necessity of rationalizing government expenditures and combating tax evasion. In addition, more coordination between fiscal and monetary policies.
Highlights
Jordan started borrowing abroad to finance budget deficit
Empirical Results and Interpretations In VAR model, all variables must be stationary before the analysis, Augmented Dickey-Fuller (ADF) (Dickey and Fuller, 1981) unit root test performed in order to determine whether the variables are stationary
Money supply has a positive impact on public debt in the short run
Summary
Jordan reached a high level of indebtedness and faced a debt crisis in 1989. At the end of 2019, Public debt reached 95 % of GDP, the ratio of external debt to GDP (39%), the ratio of domestic debt to GDP (65%) Reinhart and Rogoff (2010 a) emphasized that in developed and developing economies when the ratio of public debt to GDP is above 90%, this leads to a 1% drop in economic growth rates. When the external debt ratio reaches (60%) of GDP, economic growth will decrease by (2%). Reinhart and Rogoff (2010 b) emphasized that there is a strong relationship between banking crises and sovereign default debt in many developed and emerging countries. Governments often have "hidden debts" that exceed the documented levels of external debt
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