The Symmetric and Asymmetric Nexus Between Monetary Policy Interest Rate and Core Inflation in Jordan
DOI:
https://doi.org/10.35516/jjes.v11i1.815Abstract
Objectives: This study investigates monetary policy's symmetric and asymmetric impacts on core inflation in Jordan. It employs linear and nonlinear autoregressive distributed lag (NARDL) models. The research also seeks to assess the relationship between the overnight deposit rate, money supply growth, and real GDP growth on core inflation and to explore potential linear or nonlinear effects.
Methods: The study applies ARDL and NARDL models to estimate the relationships above. It utilizes data from the first quarter of 1998 to the first quarter of 2023. Tests for Granger causality are conducted, and the Brock-Dechert-Scheinkman (BDS) test is employed to ascertain the presence of nonlinear paths within the study variable. Robustness checks are conducted to ensure parameter stability.
Results: The analysis provides compelling empirical evidence supporting a long-term relationship between the overnight deposit rate and core inflation. The Brock-Dechert-Scheinkman (BDS) test confirms the existence of nonlinear dynamics. The ARDL model reveals a linear relationship: a 1% interest rate increase leads to a 0.26% reduction in core inflation in the long run. In contrast, the Nonlinear Autoregressive Distributed Lag (NARDL) analysis unveils an asymmetric effect: a 1% increase in the overnight deposit rate decreases core inflation by 0.43%, while a 1% reduction increases it by 0.37%.
Conclusions: These findings have critical implications for monetary policymakers. They underscore the importance of judiciously considering interest rate adjustments to manage inflation dynamics, acknowledging the nonlinear and asymmetric effects inherent in the relationship between the overnight deposit rate and core inflation. When crafting monetary policy strategies, policymakers must consider these nuanced dynamics to address inflation concerns effectively.
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