The Determinants of Money Demand in Jordan: ARDL Approach

Abstract

The current study examined the relationship between real money demand (M2) and its determinants represented by real gross domestic product, real interest rate, inflation rate and budget deficit in Jordan for the period (2000Q1-20018Q1). The study used unit root test, Autoregressive Distributive Lag (ARDL), cointegration and long run, bound test to examine the study hypotheses. ARDL cointegration equation and ARDL Bound test show that there is a long run relationship between money demand M2 and its determinants, real interest rate, inflation rate, budget deficit and real gross domestic product. The short run ARDL results shows that the past period of money demand has a negative and significant impact on money demand, while inflation rate and Gross domestic product have a positive and significant impact on money demand in Jordan. The long run ARDL results show that the inflation rate, real gross domestic product and budget deficit have a positive long run relationship with money demand (M₂)and Its impact on (M₂ ) is positive and statistically significant at 1 percent level, while interest rate has a negative and significant impact on Money demand (M₂ ). Inflation rate, real gross domestic product, budget deficit and interest rate are good determinants for money demand M2. The cumulative sum (CUSUM) of recursive residuals and cumulative sum of squares (CUSUMQ) of recursive residuals confirm that the estimated money demand M2 model is stable.