The Effect of Money Supply(M2) on Real Magnitudes in the Economy of Jordan A Rational Expectations Approach

Abstract

This study applies a neo-classical model to test the impact of anticipated and un anticipated growth in money supply (M2) on some key economic variables in the Jourdan economy for the period (1968:1-1988:4). The model consists of four equations: (i) the money supply growth equation;(ii) the growth in unemployment rate equation; (iii) the real growth in GNP equation; and (iv) the growth in price level equation (inflation rate). The study investigates the relationships and hypotheses using two stage least square method which is applied at the first difference logarithm structural equations. The first stage is applied to the money supply (M2) growth equation in order to divide the actual growth of money supply into anticipated(predicted) and unanticipated (unpredicted) values. The second stage is applied to estimate the reactions of key economic variables (real GNP, growth in price level, and growth in unemployment rate) to the anticipated and unanticipated money supply growth. The major results of this study can be summarized as follows: (i) Anticipated money supply growth, or the systematic policy in the growth of money supply, affects the real key economic variables in the direction of the policy goal, while the unanticipated growth in money supply mostly gives an uncertain direction of its impact on the key economic variables included in the study; (ii) fiscal policies have a greater impact than monetary policies in reducing unemployment rate; and (iii) lagged real GNP growth and price level growth have strong expansionary impact on money supply, whereas the impact of lagged unemployment rate on the expansion of money supply is rather weak.