vol 25 no3,2025

Long-run relationships between money, prices, and output: A case study of Jordan

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Long-run relationships between money, prices, and output: A case study of Jordan.

Abstract:

This study examines the long-run relationship between monetary aggregates, prices, and real output in the Jordanian economy using quarterly data for the period 2008-2023. The study applied Johansen cointegration analysis to investigate the long-run relationship between variables. The results showed the existence of a long-run equilibrium relationship between the three variables. The study findings revealed that narrow money supply (M1) is neutral, as changes in it did not lead to changes in the rate of real output growth, while broad money supply (M2) is non-neutral, as a 1% increase in broad money supply led to a 0.28% increase in real GDP. The results also showed a positive relationship between price level and real income growth. Addressing potential endogeneity concerns, the study recommends a monetary policy that relies on monitoring broad monetary aggregates (M2) as a better indicator for influencing economic growth, with the necessity of coordination with fiscal policy to address the specific challenges of the Jordanian economy.

Keywords: Quantity Theory of Money, Stationarity, Cointegration, Long-run Relationship, Jordan Economy, Monetary Policy.

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