Foreign Currency Substitution in Jordan

Foreign Currency Substitution in Jordan

Taleb M. Awad*

* Associate Prof., Economic Department, University of Jordan, Jordan.

Received : 00-00-0000 , Accepted : 00-00-0000

Language: English

Abstract

The major goal of the study is to investigate the extent of currency substitution and the factors influencing it in Jordan. A theoretical model has been developed and used for econometric analysis covering the period between 1980- 1994. The empirical results lend support to the theoretical model used for estimation. Factors such as domestic interest rate, foreign interest rate, and policy change are significantly affecting currency substitution and accounted for most of its variations. However, the elasticity of currency substitution is found to be low (less than one). Furthermore, the results show that the crises of the JD that started in 1988 and the subsequent floating of the exchange rates had contributed significantly to the phenomena of currency substitution in Jordan. In particular, the policy shift toward floating the JD has almost doubled the elasticity of money substitution. This effect of increasing foreign currency substitution in Jordan has significant impact on the effectiveness of monetary policy. The formulation of monetary policy under floating exchange rates must be reconsidered to explicitly accounts for monetary dependence rather than monetary independence.

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