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---

### I. Introduction and Role of JAM2.0
- JAM2.0 is the modernized structural Jordan Analysis Model used as the Central Bank of Jordan’s (CBJ) core medium-term forecasting model within the Forecasting and Policy Analysis System (FPAS).
- Captures Jordan’s monetary-exchange rate regime based on an exchange rate anchor and a conventional fixed exchange rate regime.
- Purposes and capabilities:
  - Operational framework for policy analysis and forecasting customized to Jordanian data and characteristics.
  - Describes dynamics of key macro variables, identifies trends and structural breaks, and analyzes policy responses to supply, demand, and financial shocks.
  - Assists CBJ decision-making by navigating policy tradeoffs under uncertainty and analyzing domestic and global shocks (global food and fuel price shocks; global financial shocks, changes in investor risk appetites and global/U.S. interest rates).
- Key extensions and features:
  - Fiscal block to track transmission channels and effects of the (cyclically-adjusted primary) fiscal balance on the real sector.
  - Expenditure-side GDP decomposition distinguishing domestic and foreign demand.
  - Enriched open-economy analysis including interest rate and foreign exchange intervention (FXI) policies, endogenizing market-based capital flows and risk premia, and modeling dynamics of FX reserve buying/selling.
- Validation and relation to frameworks:
  - Model structure and calibration tested with simulations; impulse responses align with economic intuition and in-sample forecasts capture important data dynamics.
  - Serves as a country application of the FINEX framework under a pegged exchange rate regime and emphasizes fiscal-monetary interactions in line with the IMF’s Integrated Policy Framework (IPF).

### II. Stylized Facts Motivating JAM2.0 Design
- Motives for design choices:
  - Pegged exchange rate regime with a committed exchange rate nominal anchor and reserve adequacy-based rule.
  - Jordan as a small open economy exposed to trading partner developments.
  - Need to capture detailed determinants of domestic and external demand and distinct implications for inflation.
  - Importance of analyzing inflation dynamics including trends in relative prices.
  - Role of fiscal policy and favorable access to international financial markets.
  - Use of overnight interbank market rate as counterparty to CBJ main policy rate to signal monetary stance.
- Model departs from standard QPMs by incorporating country-specific features and operational decomposition.

### III. Real Sector, Output, and Prices
- GDP, output gap, and recent performance:
  - Growth of 2.2 percent in 2021.
  - Estimated output gap for 2021: -1.7 percent, expected to close in the second half of 2022.
  - Real GDP growth projected to reach 2.7 percent in 2022.
  - Drivers of recovery in 2021–22 included manufacturing, finance/insurance/business services, travel receipts, exports, remittances, vaccination acceleration, accommodative monetary conditions, higher export commodity prices (notably phosphate), and tourism revival.
  - Downside pressures beyond 2022: surge in energy and food prices and global macro tightening.
- CPI decomposition and relative price trends:
  - Headline CPI = weighted average of core CPI (55 percent weight) and non-core CPI (45 percent).
  - Core CPI composition: core services 82 percent of core; core goods 18 percent of core.
  - CPI food inflation weight: 26.5 percent of overall CPI.
  - Fuel prices weight: 4.7 percent of CPI.
  - Headline inflation: contained in 2021, rose moderately until March 2022, then sharply increased to 5.4 percent (year-on-year) in August 2022.
  - Core inflation: 4.3 percent (year-on-year) in August 2022.
  - Relative prices declined (core vs headline) during 2005–2013; stabilized since 2015 but can change for prolonged periods; ignoring relative-price trends biases subcomponent dynamics.
  - Drivers of inflation pickup: surging food prices (input bottlenecks, Russia-Ukraine war), upward domestic petroleum price adjustments with second-round effects (higher-than-expected wage and transport fare increases), and increase in non-commodity import prices.
  - Mitigants: long-term stable-price import contracts for natural gas used in electricity generation, phased-out blanket fuel subsidies, disinflationary effect from low domestic demand (negative output gap) and phased-out fiscal measures.

### IV. Monetary Policy, Market Rates, and Monetary Conditions
- CBJ objectives and operational framework:
  - Primary objective: ensuring price and monetary stability while protecting pegged exchange rate stability and facilitating full capital mobility.
  - Operational reliance on overnight interbank rates and a corridor system with two key rates: overnight deposit interest rate (window rate) as floor; overnight repurchase agreement interest rate (repo rate) as ceiling.
  - CBJ sets its “CBJ main rate” at 25 basis points (bps) above the window rate.
  - Excess liquidity kept interbank short rates close to the overnight deposit rate; overnight deposit rate is the effective CBJ policy rate and is used as the reference rate in JAM2.0.
- Real monetary conditions:
  - Real interest rate (RIR) measured as nominal interest rate minus inflation; generally remained around 1 percent and mostly positive historically.
  - In 2022 the RIR turned negative, indicating an accommodative monetary stance due to the surge in inflation.
  - Real exchange rate (RER; bilateral with respect to the U.S., index 2002Q1=100) depreciated since 2019 due to imported inflation; RER depreciation contributed to an expansionary monetary stance, particularly in H1 2022.
  - Combined negative RIR and RER depreciation signaled an expansionary monetary policy stance in Jordan during 2022.
- Monetary regime under the peg:
  - Domestic policy rate typically moves closely with the Federal Reserve Fund rate, adjusted by country risk premium; CBJ raised policy rates keeping a margin of 200 basis points (bps) above the Fed rate to maintain attractiveness of JD deposits in the period noted.
  - CBJ maintained an SME lending scheme through December 2022 at 2 percent; scheme terminated in April 2023. Another subsidized lending scheme supporting ten vital sectors retained with a ceiling of JD 1.4 billion.

### V. Financial Sector and Banking
- Banking sector resilience and indicators:
  - Capital adequacy ratio ranged between 17 and 21 percent from 2007 to 2020.
  - Total credit to GDP ratio: 92.6 percent of GDP at end-2020.
  - Credit penetration reached 93.7 percent of GDP in 2021.
  - Financial stability index: 0.44 in 2020; 0.47 in 2021.
  - Assessment: financial system “remains sufficiently stable” with soundness, stability, high resilience, strong capitalization, adequate liquidity, and effective CBJ support measures.
- COVID-19 responses:
  - Postponed dividend distributions (resumed in 2020), reduced required reserve ratio, repurchase agreements, postponed loan installments, supportive lending schemes for SMEs and key sectors.

### VI. Fiscal Balances, Public Debt, and Fiscal Block
- Public debt and deficits:
  - Public debt-to-GDP ratio rose since 2008 and "surpassed 100 percent by 2020."
  - Elevated public debt persisted into 2022, "including the debt held by the Social Security Investment Fund."
  - Approximately half of public debt denominated in foreign currency.
  - General government overall deficit is "currently around 5 percent of GDP, including grants."
  - Interest payments on debt have been growing faster than primary deficits.
  - Authorities are "carefully examining the details of a fiscal consolidation strategy" to preserve debt sustainability and gradually reduce public debt-to-GDP ratio.
- Fiscal block capabilities and mechanics:
  - Anchors public debt accumulation via a fiscal rule for the structural (cyclically-adjusted primary) deficit; stock-flow consistency for debt trajectories.
  - Models interest cost of LCY and FCY debt, 1-year maturities, issuance split by financing plan 휃, and exponential adjustments for nominal GDP and exchange rate changes.
  - Fiscal rule: structural deficit responds to persistence, output gap, and expected deviation of debt from target; fiscal impulse to real economy defined as function of structural deficit gap.

### VII. External Sector, Trade, Tourism, and Reserves
- Trade and composition:
  - Exports close to 40 percent of nominal GDP.
  - Imports around 60 percent of nominal GDP.
  - Main trading partners: United States, Euro Area, India, China, GCC countries, and Iraq.
  - Export composition: clothes, phosphate products, potash, fertilizers, medical products.
  - Import composition: machinery and transport equipment, fuel, food, manufactured goods.
- Travel receipts and remittances:
  - Travel receipts averaged 7.4 percent of GDP during 2019-2021.
  - Travel receipts in 2022 grew by 110.5 percent compared to 2021.
  - Tourist receipts rebounded to 100.4 percent of the level recorded in 2019.
  - Workers’ remittances: grew by 1.0 percent in 2021 and increased by 1.5 percent in 2022.
- Current account and financial account:
  - Current account deficit expected to reach 8.5 percent of GDP in 2022.
  - Net FDI fell by over 17 percent in 2021 to 1.3 percent of GDP (down from 1.7 percent of GDP in 2020).
  - Portfolio recorded an out-flow in 2021; Eurobonds of USD 1.25 billion matured and USD 1.75 billion were issued in 2020.
  - Government net official loans rose by nearly 26 percent (from USD 0.967 billion in 2020 to USD 1.22 billion in 2021).
  - IMF-EFF disbursements of about USD 542 million in 2021; SDR augmentation of USD 469 million during 2021.
  - Banks' net foreign assets reduced considerably due to increase in non-resident deposits of roughly USD 1.2 billion during 2021; these flows helped cover the CAD in 2021 and meet EFF NIR targets.
- Foreign exchange reserves and adequacy:
  - Gross foreign reserves (excluding banks deposits in FX at CBJ): US$18 billion (39.9 percent of GDP) at end-2021; US$16.7 billion (37.0 percent of GDP) in September 2022; US$15.9 billion at end-2020.
  - Reserves coverage of imports: about 7.2 months of imports at end-2021; around 7.1 months as of September 2022.
  - Reserves exceeded 100 percent of the IMF’s reserve adequacy metric during 2021.
  - Historical reserves coverage fluctuated between "3 and 10 months" of imports; CBJ reserves reached "8 months of imports at end-2021."
- Exchange rate regime and capital openness:
  - Classified as a de-facto peg arrangement since October 1995; CBJ intervenes as needed.
  - Capital and financial accounts open (Chinn-Ito index "close to one").
- REER assessment:
  - REER "fairly valued in the long run."
  - Appreciated by 15 percent from 2012-2019; depreciated significantly since the beginning of the pandemic driven by weak inflation in Jordan relative to trading partners and the weaker dollar.
- Model treatment:
  - Foreign variables enter JAM2.0 in effective terms using trade weights; external variables approximated using AR processes with no interaction among them in the model.

### VIII. Model Structure, Gaps, and Key Equations
- JAM2.0 is a "gap model": real variables decomposed into trend and gap components; gaps converge to zero over 3-6 years; time-varying trends converge to balanced-growth steady state over 10-15 years.
- Five policy-relevant gaps:
  1. Output gap — deviation of real GDP from potential.
  2. Real exchange rate (RER) gap — deviation from equilibrium.
  3. Real interest rate (RIR) gap — deviation of real short-term rate from natural level.
  4. Fiscal impulse — difference between structural primary deficit and target.
  5. Net private financial flows — private sector foreign financing need excluding public financing and central bank intervention.
- Representative blocks and specific equations:
  - Real aggregate demand: domestic demand gap IS-style equation, export gap, import gap, and potential GDP AR with Δy^{SS}_y = 3 percent.
  - Prices: headline CPI decomposed into core and non-core; core Phillips curve and real marginal costs include output gap, reer gap, world oil and food real-price gaps, and relative price gap rp̂; non-core uses an implicit non-core inflation target.
  - External balance: BoP identity 0 = ca_rat + fa_rat; current account ratio composed of net exports, remittances, interest costs, and other items; financial account includes net foreign private inflows, FX interventions fxi_rat, planned reserve accumulation fxa_rat, and debt maturing adjustments.
  - Monetary policy: UIP linking domestic rate to US rate plus country risk premium; FXI-rule links interventions to current account gap, foreign reserves gap, and interest rate differential.
  - Fiscal block: stock-flow consistent debt accumulation, decomposition by LCY and FCY, 1-year issuance rules, and fiscal rule for structural deficit responding to expected debt deviation.
- Notation conventions:
  - Small letters xt denote natural logarithm of variable multiplied by 100; hats indicate gaps, bars indicate trends, foreign variables with asterisk, steady state superscript ss; annualized quarter-on-quarter change denoted by Δx; shocks εi.

### IX. Impulse Response Scenarios and Key Simulation Findings
- Foreign inflation shock:
  - One percent shock to foreign (U.S.) inflation in first quarter results in U.S. inflation peaking around "about 0.5 percent" y-o-y within one year; Fed raises nominal rate, Jordan follows to maintain peg; domestic inflation rises but less than U.S.; RER depreciates, exports improve, current account improves; central bank initially accumulates reserves; domestic demand dampened by tighter policy.
- Oil price increase:
  - World oil price increases by "25 percent" over one year lead to higher non-core inflation; passthrough gradual partly due to government stabilized contract prices; food passthrough stronger; net exports and current account deteriorate; central bank intervenes (sell reserves); negative output gap opens.
- Drop in domestic demand:
  - Scenario calibrated with output gap reduction of "1 percent": negative output gap lowers prices; CBJ keeps policy rate aligned with Fed under the peg; domestic prices decline improving net exports and current account, aiding output gap closure.
- Domestic cost-push shock:
  - Positive cost-push on core inflation raises domestic prices, reduces competitiveness, worsens current account; CBJ sells FX reserves to defend peg; output gap falls despite negative real policy rates.
- Domestic fiscal stimulus:
  - Increase in government spending by "1 percent of nominal GDP" over 1 year yields a larger fiscal multiplier under the peg; debt-to-GDP ratio rises and "peaks at about 1 year" after shock; country risk premium increases and central bank raises policy rate; output gap and inflation increase; competitiveness and current account deteriorate.

### X. Calibration, Forecasting Performance, and Historical Decomposition
- Calibration: parameters grouped into steady-state, structural coefficients, non-structural AR processes, and shock standard deviations.
- In-sample forecasting (from 2001:Q1 start):
  - Forecast horizon up to 6 quarters ahead; external variables assumed known.
  - Headline inflation: model replicates dynamics well; average around "3 percent".
  - Real GDP growth: model forecasts slightly more volatile than actual; growth declined from about "6 percent" pre-GFC to "2 percent" after GFC.
  - Interest rate and reserves ratio: forecasts capture actual data well.
  - RMSE: JAM2.0 outperforms or comparable to random walk for inflation and medium-term horizons for interest rate and reserves; GDP forecasts have higher RMSEs than RW.
- Historical decompositions:
  - Headline inflation volatility mainly from non-core (energy); core inflation driven by foreign and commodity price shocks.
  - Output gap: positive pre-GFC, large negative during COVID-19; domestic demand, fiscal policy, and foreign shocks primary contributors.
  - Real interest rate gaps negative since 2020 indicating accommodative conditions implied by abroad; RER gap shows depreciation since 2019.
  - Government debt-to-GDP rose to and surpassed 100 percent with sharp increase at COVID-19 onset; term premium for government borrowing rose with debt-to-GDP.

### XI. Data Limitations and Recommended Model Extensions
- Data limitations:
  - Only nominal and real GDP data available for Jordan; export and import data nominal from BoP; trade deflators not directly available and approximated based on commodity structure; other BoP components and fiscal statistics available at sufficient detail.
- Recommended future extensions:
  - Incorporate real-financial sector linkages, labor market and wage variables, and more detailed public investment linkage to long-run growth as quarterly expenditure-side GDP and other data become available.

### XII. Policy Implications and Practical Uses
- JAM2.0 advances a semi-structural QPM tailored to Jordan’s peg with disaggregated demand components, multiple Phillips curves, explicit fiscal block accounting for currency composition of public debt, and expanded external sector with FX intervention mechanics.
- Practical uses:
  - Serves as CBJ’s central forecasting and policy analysis tool for medium-term baselines and alternative scenarios.
  - Quantifies trade-offs among interest rate policy, FX interventions, and fiscal policy under a peg, consistent with the IMF’s Integrated Policy Framework channels.
- Policy implications emphasized:
  - Need to balance internal and external objectives under the peg, manage reserves against sterilization costs, and design fiscal consolidation strategies to preserve debt sustainability.
  - Future policy analysis can leverage JAM2.0 to evaluate combinations of monetary and fiscal measures and their implications for growth, inflation, external balances, and debt dynamics.

*Source: IMF Working Paper — An Extended Quarterly Projection Model for the Central Bank of Jordan (JAM2.0), content excerpt.*

### REFERENCES ____________________________________________________________________________________55

### An Extended Quarterly Projection Model for the Central Bank of Jordan

### I. Introduction and Role of JAM2.0
- JAM2.0 is the modernized structural Jordan Analysis Model used as the Central Bank of Jordan’s (CBJ) core medium-term forecasting model within the Forecasting and Policy Analysis System (FPAS).
- Captures Jordan’s monetary-exchange rate regime based on an exchange rate anchor and a conventional fixed exchange rate regime.
- Purposes and capabilities:
  - Provides an operational framework for policy analysis and forecasting customized to Jordanian data and characteristics.
  - Describes dynamics of key macro variables, identifies trends and structural breaks, and analyzes policy responses to supply, demand, and financial shocks.
  - Assists CBJ decision-making by navigating policy tradeoffs under uncertainty and analyzing domestic and global shocks (global food and fuel price shocks; global financial shocks, changes in investor risk appetites and global/U.S. interest rates).
- Key extensions and features:
  - Fiscal block to track transmission channels and effects of the (cyclically-adjusted primary) fiscal balance on the real sector.
  - Expenditure-side GDP decomposition distinguishing domestic and foreign demand.
  - Enriched open-economy analysis including interest rate and foreign exchange intervention (FXI) policies, endogenizing market-based capital flows and risk premia, and modeling dynamics of FX reserve buying/selling.
- Validation:
  - Model structure and calibration are tested with simulations; impulse responses align with economic intuition and ex-post in-sample forecasts capture important data dynamics.
- Relationship to broader frameworks:
  - Serves as a country application of the FINEX framework under a pegged exchange rate regime.
  - Emphasizes fiscal-monetary policy interactions in line with the IMF’s Integrated Policy Framework (IPF).

### II. Stylized Facts Motivating JAM2.0 Design
- Model departs from standard highly aggregated QPMs by incorporating country-specific features and a more operational decomposition.
- Motivations include:
  - Pegged exchange rate regime with a committed exchange rate nominal anchor and reserve adequacy-based rule.
  - Jordan as a small open economy exposed to trading partner developments.
  - Need to capture detailed determinants of domestic and external demand and distinct implications for inflation.
  - Importance of analyzing inflation dynamics including trends in relative prices.
  - Role of fiscal policy and favorable access to international financial markets.
  - Use of overnight interbank market rate as counterparty to CBJ main policy rate to signal monetary stance.

### II.1 GDP and Production: Recent Performance and Model Implications
- Growth and output gap:
  - The Jordanian economy experienced growth of 2.2 percent in 2021.
  - Estimated output gap for 2021 stood at -1.7 percent, expected to close in the second half of 2022.
  - In 2022, real GDP growth was projected to reach 2.7 percent.
- Drivers of recovery in 2021–22:
  - Robust recovery in manufacturing and the finance, insurance, and business services sectors.
  - Recovery of external sector: travel receipts, exports, and remittances.
  - Acceleration of national vaccination campaign and full reopening by September 2021.
  - Accommodative monetary conditions, rise in export commodity prices (notably phosphate), and revival of tourism.
- Downside pressures beyond 2022:
  - Surge in energy and food prices and global tightening of macroeconomic policies expected to exert downward pressure on real growth.

### II.2 Core and Non-Core Prices; Relative Price Trends
- CPI decomposition in JAM2.0:
  - Headline CPI specified as weighted average of core CPI and non-core CPI: core CPI represents 55 percent of total weight; non-core CPI represents 45 percent.
  - Core CPI composition: core services 82 percent of core; core goods 18 percent of core.
  - Non-core inflation: mainly energy and food items.
  - CPI food inflation weight: 26.5 percent of overall CPI.
  - Fuel prices weight: 4.7 percent of CPI.
- Determinants and dynamics:
  - Core subcomponents determined by output gap, inflation expectations, real wage pressures, real exchange rate gap, and imported inflation.
  - Relative prices exhibited a decline in core item prices relative to headline CPI during 2005–2013; non-core inflation grew faster than core inflation, producing non-stationary relative prices.
  - Relative prices stabilized since 2015, but periods of relative price changes can be prolonged; ignoring these trends biases subcomponent inflation dynamics.
- Recent inflation developments:
  - Headline inflation contained in 2021, rose moderately until March 2022, then sharply increased to 5.4 percent (year-on-year) in August 2022.
  - Core inflation reached 4.3 percent (year-on-year) in August 2022.
  - Contributing factors to the inflation pickup:
    - Surging food prices exacerbated by input supply bottlenecks and the Russia-Ukraine war.
    - Upward adjustments in domestic petroleum prices with second-round effects (higher-than-expected wage and transport fare increases).
    - Increase in non-commodity import prices.
  - Mitigating factors:
    - Long-term stable-price import contracts for natural gas used in electricity generation.
    - Phased-out blanket fuel subsidies.
    - Disinflationary effect from low domestic demand (negative output gap) and phased-out fiscal measures.
  - Managing price stability became a priority due to abrupt pickup in headline and core inflation.

### II.3 Monetary Policy, Market Rates, and Monetary Conditions
- CBJ objectives and operational framework:
  - Primary objective: ensuring price and monetary stability while protecting pegged exchange rate stability and facilitating full capital mobility.
  - Operational reliance on overnight interbank rates and a corridor system with two key rates:
    - Overnight deposit interest rate (window rate) serves as the floor.
    - Overnight repurchase agreement interest rate (repo rate) serves as the ceiling.
  - CBJ sets its “CBJ main rate” at 25 basis points (bps) above the window rate.
  - Due to excess liquidity deposited in the CBJ overnight deposit facility, interbank short rates have remained close to the overnight deposit rate; the overnight deposit rate is considered the effective CBJ policy rate and is used as the reference rate in JAM2.0.
- Real monetary conditions indicators:
  - Real interest rate (RIR) measured as nominal interest rate minus inflation; generally remained around 1 percent and mostly positive historically.
  - In 2022 the RIR turned negative, indicating an accommodative monetary stance due to the surge in inflation.
  - Real exchange rate (RER; bilateral with respect to the U.S., index 2002Q1=100) has depreciated since 2019 due to imported inflation from higher foreign prices; RER depreciation contributed to an expansionary monetary policy stance, particularly in H1 2022.
  - Combined negative RIR and RER depreciation signaled an expansionary monetary policy stance in Jordan during 2022.

### II.4 Banking Sector and Credit
- Banking sector resilience:
  - Capital adequacy ratio ranged between 17 and 21 percent from 2007 to 2020, above CBJ and Basel Committee minimum requirements.
- COVID-19 policy responses:
  - Postponed dividend distributions to bolster bank capital; dividend distribution resumed in 2020 following regulations.
  - Measures to increase liquidity ratios: reducing required reserve ratio and conducting repurchase agreements.
  - Supportive measures: postponed loan installments, supportive lending schemes for affected SMEs and key sectors.
- Credit indicators:
  - Total credit to GDP ratio stood at 92.6 percent of GDP at the end of 2020.

*Source: IMF Working Paper — An Extended Quarterly Projection Model for the Central Bank of Jordan (content excerpt).*

### 93.7 percent of GDP in 2021. This indicates a

### wpiea2023172-print-pdf - 93.7 percent of GDP in 2021. This indicates a

### Financial sector health and banking resilience
- Credit penetration reached 93.7 percent of GDP in 2021, indicating a healthy level of credit provision.
- Financial stability index:
  - 0.44 in 2020
  - 0.47 in 2021
- Assessment: the financial system in Jordan "remains sufficiently stable" and has shown resilience despite the pandemic and subsequent crises.
- Banking sector characteristics: soundness, stability, high resilience, strong capitalization, adequate liquidity, and effective CBJ measures to support the economy.

### Fiscal balances and public debt
- Public debt dynamics:
  - Public debt-to-GDP ratio rose since 2008 and "surpassed 100 percent by 2020."
  - Elevated public debt persisted into 2022, "including the debt held by the Social Security Investment Fund."
  - Approximately half of public debt is denominated in foreign currency.
- Fiscal stance and deficits:
  - Fiscal policy adopted a countercyclical stance in response to COVID-19, contributing to a significant increase in debt.
  - The fiscal deficit (general government overall deficit) is "currently around 5 percent of GDP, including grants."
  - Interest payments on debt have been growing at a relatively faster pace compared to primary deficits.
- Policy implications:
  - Authorities are "carefully examining the details of a fiscal consolidation strategy" to preserve debt sustainability and gradually reduce the public debt-to-GDP ratio over time.

### Fuel, food price shocks, and subsidy policy
- World fuel and food price impacts:
  - Oil derivatives increased by an average of 16.3 percent since the beginning of the Russia-Ukraine war up to September 2022.
- Government response:
  - Blanket fuel subsidies re-introduced in February 2022, later phased out and replaced by direct payment schemes targeted to individuals and sectors.
  - Targeted fuel subsidy programs implemented from July to the end of 2022.
- Pass-through dynamics:
  - DOS analysis indicates pass-through of world oil prices to energy-related items in the consumer basket "typically with one month lag."
- Policy objective: limit pass-through to protect consumers and mitigate inflationary pressures from global price shocks.

### Pegged exchange rate regime and FX reserve management
- Exchange rate regime:
  - Classified as a de-facto peg arrangement since October 1995; CBJ intervenes on the FX market as needed.
  - Capital and financial accounts are open as indicated by a Chinn-Ito index "close to one."
- Foreign exchange reserves:
  - Gross foreign reserves (excluding banks deposits in FX at CBJ):
    - US$18 billion (39.9 percent of GDP) at end-2021
    - US$16.7 billion (37.0 percent of GDP) in September 2022
    - US$15.9 billion at end-2020
  - Reserves coverage of imports of goods and services:
    - about 7.2 months of imports at end-2021
    - around 7.1 months as of September 2022
  - Reserves exceeded 100 percent of the IMF’s reserve adequacy metric during 2021 (as noted in the IMF Country Report (2022), Annex II).
- Monetary policy and CBJ rate behavior:
  - Under the peg and open capital account, CBJ policy rate typically moved closely with the Federal Reserve Fund rate, adjusted by country risk premium.
  - CBJ raised policy rates, maintaining a margin of 200 basis points (bps) above the Fed rate, to maintain attractiveness of JD deposits.
  - CBJ maintained an SME lending scheme through December 2022 at low interest rates (2 percent); this scheme was terminated in April 2023.
  - CBJ retained another subsidized lending scheme supporting ten vital economic sectors, with a ceiling of JD 1.4 billion.

### Real effective exchange rate (REER) and external variables in JAM 2.0
- REER assessment:
  - REER is "fairly valued in the long run."
  - Short-run movements:
    - Appreciated by 15 percent from 2012-2019 (reflecting global strength of the dollar).
    - Depreciated significantly since the beginning of the pandemic driven by weak inflation in Jordan relative to trading partners and the weaker dollar.
- Model application:
  - Foreign variables enter JAM 2.0 in effective terms, using trade weights for the real exchange rate, foreign demand, and inflation.

### External sector, trade structure, and tourism
- Trade shares of nominal GDP:
  - Exports close to 40 percent of nominal GDP.
  - Imports around 60 percent of nominal GDP.
- Main trading partners: United States, Euro Area countries, emerging and developing Asian countries (such as India and China), Gulf Cooperation Council (GCC) countries, and Iraq.
- Export composition: clothes (light industries, apparel, and textile industry), phosphate products, potash, fertilizers, and medical products.
- Import composition: machinery and transport equipment, fuel, food, and manufactured goods.
- Travel receipts and remittances:
  - Travel receipts averaged 7.4 percent of GDP during 2019-2021.
  - Recovery of tourist arrivals began in the second half of 2021 and progressed toward pre-pandemic levels.
  - Travel receipts in 2022 grew by 110.5 percent compared to 2021.

*IMF WORKING PAPERS An Extended Quarterly Projection Model for the Central Bank of Jordan — INTERNATIONAL MONETARY FUND*

### 100.4 percent of the level recorded in 2019,

### wpiea2023172-print-pdf - 100.4 percent of the level recorded in 2019,

### External sector and tourism recovery
- Tourist receipts rebounded to 100.4 percent of the level recorded in 2019, indicating a rebound in the tourism sector.
- The increase in the number of tourists included non-resident Jordanians and tourists from Arab countries, contributing to tourism growth.
- Workers’ remittances:
  - grew by 1.0 percent in 2021.
  - increased by 1.5 percent in 2022.
- Monitoring travel receipts and remittances is crucial for assessing the resilience of the tourism sector and the financial well-being of households relying on remittances.

### Current account and financial account developments
- The current account deficit was expected to reach 8.5 percent of GDP in 2022, driven by:
  - a pickup in imports with higher economic activity,
  - higher energy and food prices,
  - imports rising more strongly than exports, remittances, and tourism receipts.
- Financial account movements in 2021:
  - Net foreign direct investment (FDI) fell by over 17 percent in 2021 to 1.3 percent of GDP (down from 1.7 percent of GDP in 2020).
  - The portfolio recorded an out-flow in 2021, compared to an inflow in 2020, as Eurobonds of USD 1.25 billion matured and USD 1.75 billion were issued in 2020.
- Government and official flows increased to support external stability:
  - Government net official loans rose by nearly 26 percent (from USD 0.967 billion in 2020 to USD 1.22 billion in 2021).
  - IMF-EFF disbursements of around of about USD 542 million in 2021.
  - SDR augmentation of USD 469 million during 2021.
- Banking sector and reserves:
  - Considerable reduction in banks' net foreign assets driven by an increase in non-resident deposits of roughly USD 1.2 billion during 2021.
  - These increased flows helped cover the current account deficit (CAD) in 2021 and attenuate pressures on foreign reserves.
  - These flows helped the authorities meet the EFF program’s net international reserves (NIR) targets by comfortable margins.

### JAM 2.0 — External assumptions and transmission
- Diversification of export destinations and import origins is captured by foreign variables in effective terms constructed as weighted averages of indicators from: the United States, the eurozone, China, Japan, Brazil, India, Russia, the United Kingdom, and South Africa.
  - These countries account for more than 60 percent of trade in goods and services for Jordan in recent years.
- External variables are approximated using simple autoregressive (AR) processes; there is no interaction among external variables within the model.
- Transmission channels:
  - Foreign demand transmits to domestic variables via exports of goods and services.
  - Changes in foreign interest rates transmit to domestic variables through an uncovered interest parity (UIP) condition relating interest rate differentials to exchange rate movements.
- External outlook for foreign variables, including estimations of gaps and trends, is derived from projections developed by a third-party provider.

### Data limitations
- Available data in JAM2.0:
  - Only nominal and real GDP data are available for the Jordanian economy.
  - Export and import data are available in nominal terms from the balance of payments (BoP).
  - Corresponding deflators for trade flows are not directly available; the model approximates deflators based on the commodity structure of imports and exports.
  - Other BoP components and fiscal statistics are available at a sufficient level of detail for model development.

### Model structure, gaps, and dynamics
- JAM 2.0 is a “gap model”:
  - Decomposes real variables into a trend component and a gap component.
  - Gaps converge to zero as business cycle shocks dissipate, typically over 3-6 years.
  - Time-varying trends converge to a "balanced-growth" steady state over 10-15 years.
- Key elements the model emphasizes:
  - Internal balance: disaggregated IS curve, Phillips curves decomposing inflation into core and non-core components.
  - External balance: private (portfolio) financial flows interacting with exchange rate-adjusted interest-rate differentials and an explicit BoP framework.
  - Policies: monetary (interest rates, FXI, possible CFMs) and fiscal (government absorption, taxes) respond to inflation, output gap, exchange rate, debt levels; macroprudential and labor market policies left for future extensions.
- Five policy-relevant gaps in the QPM:
  1. Output gap — deviation of real GDP from potential.
  2. Real exchange rate (RER) gap — deviation of RER from equilibrium; RER defined as the price of U.S. consumption basket in terms of the JD.
  3. Real interest rate (RIR) gap — deviation of the real short-term interest rate from its natural level.
  4. Fiscal impulse — difference between structural primary deficit and its target.
  5. Net private financial flows — private sector foreign financing need, excluding public financing need and central bank intervention / reserve policy.
- Empirical estimates to September 2022:
  - A negative output gap from the COVID-19 period is closing as real GDP recovers.
  - Output gap in 2022Q3 is around -1 percent.
  - Domestic demand’s negative contribution and disinflationary effects are primarily due to fiscal stimulus withdrawal.
  - Monetary policy remained expansionary because of a continued negative real interest rate.
  - Easy monetary conditions are driven by a negative RIR gap and a positive RER gap.

### Notation and measurement conventions
- Small letters xt denote natural logarithm of variable multiplied by 100 (log × 100).
- Capital letters refer to levels of variables.
- A hat x̂t indicates a gap (deviation from equilibrium).
- A bar x̅t indicates the variable’s trend or equilibrium value.
- Foreign variables denoted with an asterisk x*t.
- Steady state indicated by superscript ss, e.g., xss.
- Ratios to nominal GDP use superscript "rat", e.g., Xtrat for trend assignment.
- Annualized quarter-on-quarter change denoted by ∆x; ∆4x denotes year-on-year growth rates.
- Stochastic shocks represented by εi, where i denotes the left-hand-side variable in structural equations.

*Source: wpiea2023172-print-pdf - 100.4 percent of the level recorded in 2019,*

### Appendix 1.

### Appendix 1.

### III.1 Internal Balance — Real Aggregate Demand (Real Economy)
- Domestic market clearing condition (1): nominal identity linking GDP (Y) to domestic demand (DD), exports (X) and imports (M) via component deflators: (1) and its log form (1’).
- Real output gap (ŷ) is the weighted sum of expenditure-component gaps (d̂d, x̂, m̂) with weights equal to long-run nominal shares (d̅d_rat, x̅_rat, m̅_rat) (see (11), (11’), (11’’)).
- Domestic demand gap equation (IS-style), (2):
  - d̂d_t = a1 d̂d_{t−1} + a2 Et d̂d_{t+1} − a3 r̂_t + a4 fiŝ_t + a5 ŷ_t + a6 remit̂_t_rat + a7 (rpĉ_t_phos − rpĉ_t_oil) + ε^{d̂d}_t
  - Features: backward-looking habit persistence (a1), forward-looking expectations (a2), real interest rate gap r̂ (monetary/credit stance), fiscal impulse fiŝ, output gap income channel, remittances remit̂, terms-of-trade components (phosphate, oil).
- Real export gap (3):
  - x̂_t = a8 x̂_{t−1} + a9 reer̂_t + a10 ŷ^w_t + ε^{x̂}_t
  - Drivers: export persistence, real effective exchange rate gap (reer̂), foreign output gap (ŷ^w).
- Real import gap (4):
  - m̂_t = a11 m̂_{t−1} + (1−a11)[ a12(d̂d_t − a13 reer̂_t) + (1−a12)(x̂_t − a14 reer̂_t) ] + ε^{m̂}_t
  - Import demand positively linked to domestic demand and exports, adjusted by reer̂ (real depreciation reduces import demand).
- Decomposition convention:
  - Levels: j_t = j̅_t + ĵ_t for j ∈ {dd, x, m, y}.
  - Trends expressed as growth rates; gaps in levels.
- Potential GDP growth AR process (5):
  - Δy̅_t = ρ_{Δy̅} Δy̅_{t−1} + (1−ρ_{Δy̅}) Δy^{SS}_y + ε^{Δy̅}_t, with Δy^{SS} = 3 percent (parameter defining steady-state growth).
- Domestic demand trend growth (6) converges to potential growth with error-correction toward long-run GDP ratio ddrat,SS.
- Export trend growth (7) similarly linked to potential growth adjusted by trend bilateral real exchange rate depreciation (Δre̅̅̅_t^x) and error-correction to x_rat,SS.
- Real import trend growth implied by growth identity (8) using time-variant nominal share weights (ratios to nominal GDP).

### III.1.1 Prices and Deflators
- In absence of detailed expenditure-side deflators, model assumes domestic demand and GDP deflators are equal; export and import deflators reflect trade structure (9) and (10):
  - p^X_t = ω_{X,US}(e_t + cpi_{t}^{US}) + ω_{X,phos}(e_t + pc_{t}^{phos}) + (1−ω_{X,US}−ω_{X,phos})(e_t + pc_{t}^{food})
  - p^M_t = ω_{M,US}(e_t + cpi_{t}^{US}) + ω_{M,oil}(e_t + pc_{t}^{oil}) + (1−ω_{M,US}−ω_{M,oil})(e_t + pc_{t}^{food})
- GDP nominal identity restated as (1’) and component-share identity (11) and trend identity (11’).
- Real output gap composition via exponential-linearized form (11’’).

### III.1.2 Aggregate Supply — Phillips Curves (Inflation)
- Headline CPI decomposition (12’): cpi_t = w_cpi cpi_{t}^{core} + (1−w_cpi) cpi_{t}^{ncore} + ε^{cpi}_t; headline inflation (Δcpi_t) in (12) and q-o-q annualized rates in (12’’).
- Relative prices defined (13): rp_t^i = cpi_{t}^i − cpi_t; relative price gaps and trends matter due to persistent differences between core and non-core.
- Real world commodity prices deflated by U.S. CPI (14): rpc_t^{comm} = pc_t^{comm} − cpi_t^{US}; decomposition into trend and gap (15).

Core inflation (16)–(17):
- Core Phillips curve (16): Δcpi^{core}_t = b1 Δcpi^{core}_{t−1} + (1−b1) Et Δcpi^{core}_{t+1} + rmc^{core}_t + ε^{Δcpi}_{core,t}
- Real marginal costs rmc^{core}_t (17):
  - rmc^{core}_t = b2 ŷ_t + b3 reer̂_t + b4 (rpĉ^{oil}_t + r̂e_t) + b5 (rpĉ^{food}_t + r̂e_t) − b6 (1/(1−w_cpi)) rp̂_t
  - Captures output gap (domestic costs), real effective exchange rate gap (imported costs), world oil and food real-price gaps adjusted by r̂e, and relative price gap rp̂.

Relative price trend AR (20):
- Δrp̅_t = ρ_{Δrp̅} Δrp̅_{t−1} + (1−ρ_{Δrp̅}) Δrp^{ss} + ε^{Δrp̅}_t.

Non-core inflation (21)–(22):
- Non-core specification (21): Δcpi^{ncore}_t = d1 Δcpi^{ncore}_{t−1} + (1−d1) Δcpi^{ncore,TA R}_t + (1−d1) rmc^{ncore}_t + ε^{Δcpi}_{ncore,t}
  - Uses an implicit non-core inflation target Δcpi^{ncore,TAR} rather than forward-looking expectations (government smoothing of energy/food).
- Non-core real marginal costs (22):
  - rmc^{ncore}_t = d2(rpĉ^{oil}_t + r̂e_t + (1/(1−w_cpi)) rp̂_t) + d3(rpĉ^{food}_t + r̂e_t + (1/(1−w_cpi)) rp̂_t) − d4 (1/(1−w_cpi)) rp̂_t
  - No output gap term; non-core driven by world oil and food prices adjusted by r̂e and relative price spillovers.

III.1.2.E GDP deflator approximation (23)–(24):
- Nominal GDP: gdp^{nom}_t = y_t + defl^{GDP}_t (23).
- GDP deflator dynamics approximated by CPI (24):
  - Δdefl^{GDP}_t = ρ_{Δdefl^{GDP}} Δdefl^{GDP}_{t−1} + (1−ρ_{Δdefl^{GDP}}) Δcpi_t + ε^{Δdefl^{GDP}}_t.

### III.2 External Balance (BoP)
- BoP identity (25): 0 = ca_rat_t + fa_rat_t; identity in trends (25’).
- Current account ratio (26): ca_rat_t = nx_rat_t + remit_rat_t − intcost^*_t rat + oth_rat_t.
  - Net exports: nx_rat_t = x_rat_t − m_rat_t (28).
- Trend decompositions:
  - nx̅_rat_t = x̅_rat_t − m̅_rat_t (29).
  - Current account gap: câ_rat_t = ca_rat_t − ca̅_rat_t (27).
- Remittances:
  - Level decomposition (31): remit_rat_t = remit̅_rat_t + remit̂_t_rat.
  - Trend AR (32): remit̅_rat_t = ρ_{remit̅_rat} remit̅_{t−1}_rat + (1−ρ_{remit̅_rat}) remit_rat,ss + ε^{remit̅}_t.
  - Remittance gap driven by foreign effective output gap (33): remit̂_t_rat = ρ_{remit̂_rat} remit̂_{t−1}_rat + (1−ρ_{remit̂_rat}) g1 ŷ^w_t + ε^{remit̂}_t.
- Other current account flows oth_rat decomposed via AR processes (34)–(35).
- Once current account determined, financial account derived by BoP identity.
- Financial account composition (36):
  - fa_rat_t = nfp_rat_t − fxi_rat_t − fxa_rat_t + debt1Y_{t,f,rat} − debt1Y_{t−4,f,rat} * exp(Δ_4 e_t /100) exp(Δ_4 gdp^{nom}_t /100)
  - Interpretation: nfp = net foreign private inflows; fxi = FX interventions (purchase positive, sale negative); fxa = planned reserves accumulation; debt1Y = 1-year government foreign debt term with maturing adjustment.
- Trend financial account (36’) assumes trend planned reserve accumulation fxa̅_rat and targeted government external debt path debt1Y_{t,f,rat,TAR}. Assumes fxi̅_rat = 0 (planned interventions captured by fxa̅_rat).

### III.3 Macroeconomic Policies
- JAM2.0 explicitly models monetary policy instruments (interest rate, FX interventions, potential CFMs) and their interaction with fiscal policy under a pegged exchange rate regime.
- The model supports analysis of policy trade-offs (internal vs external balance), BoP-targeted policies, and interactions between government financing, interest rates, and FX interventions.
- COVID-19 policy summary (model context):
  - Central bank maintained loose monetary stance, ensured liquidity, facilitated lending to SMEs, allowed borrower repayment postponements.
  - Fiscal measures supported households/businesses but led to significant fiscal deficits and higher public debt.
  - External shocks after pandemic (higher inflation in major economies, China slowdown, war in Ukraine) increased the trade-offs for policymakers.
- JAM2.0 provides a framework to analyze combinations of monetary and fiscal measures and their implications for growth, inflation, and external balances.

### III.3.1 Monetary Policy (Jordan context)
- Monetary policy objective: maintain pegged exchange rate to the U.S. dollar; exchange rate is operational target; CBJ intervenes in FX markets and maintains international reserves as buffer.
- Historical behavior: CBJ generally responded one-to-one to Fed rate hikes with small temporary deviations; matched Fed’s two 75 basis point increases in June and July 2022 by raising CBJ instrument rates (with some subsidized lending schemes unchanged).
- Reserve adequacy: CBJ operationally defines adequate reserve buffers as above 100 percent of the Fund’s Assessing Reserve Adequacy (ARA) metric (reference in text).
- Reported reserves: Gross international foreign reserves (GIR excluding banks deposits in FX at CBJ) stood at US$18 billion (39.9 percent of GDP) at end-2021, and US$16.7 billion (37.0 percent of GDP) in September 2022, above the end-2020 level (US$... [text truncates here]).

*Source: Appendix 1 of IMF Working Paper "An Extended Quarterly Projection Model for the Central Bank of Jordan" (JAM2.0) — model equations and block descriptions.*

### 15.9 billion). Reserves are assessed to be adequate based on coverage of about 7.2 months of imports of goods and servic

### wpiea2023172-print-pdf - 15.9 billion). Reserves are assessed to be adequate based on coverage of about 7.2 months of imports of goods and servic

### Reserves and external sector
- Key statistics and assessments:
  - FX reserves: "15.9 billion".
  - Reserves coverage: "about 7.2 months of imports of goods and services".
  - Coverage relative to IMF metric: "about 100 percent of the IMF’s reserve adequacy metric as of end-2021".
  - Historical reserves range: fluctuated between "3 and 10 months" of imports.
  - CBJ reserves reached "8 months of imports at end-2021".
- Model features relevant to reserves and intervention:
  - JAM2.0 endogenizes the need to accumulate and maintain FX reserves as a pre-condition for FX intervention and balances reserve size against sterilization costs.
  - FX intervention (푓푥푖푟푎푡) is modeled as a ratio to GDP and follows a reaction rule function of the current account deficit, foreign reserves gap (푓푥푟푒푠̂ 푟푎푡푖푚푝), and interest rate differential (equation (41)).
  - Reserve accumulation equation links interventions, a planned accumulation strategy, and yield approximated by the U.S. interest rate (equation (43)).

### Monetary regime, interest parity, and country risk premium
- Regime and determination:
  - Exchange rate regime: pegged/managed peg; domestic policy rate largely follows the Fed rate under the peg.
  - With full adherence to exchange rate target and full capital mobility, domestic market interest rates follow uncovered interest parity (UIP) as in equation (37): domestic interest rate equals foreign interest rate (푖푈푆) plus country risk premium (푝푟푒푚) and expected exchange rate depreciation term.
- Country risk premium decomposition:
  - Trend and gap decomposition: 푝푟푒푚푡 = 푝푟푒푚̅̅̅̅̅̅̅푡 + 푝푟푒푚̂푡 (equation (38)).
  - Trend premium linked to trend in net foreign private inflows via equation (39).
  - Premium gap linked to net foreign private financing gap via equation (40).
  - Parameters capturing capital mobility and nonlinear debt risk: ℎ1, ℎ2, ℎ3 (ℎ3 captures exponential rise in risk with public debt, i.e., "sudden stops").

### Fiscal block: structure, debt dynamics, and fiscal reaction
- Fiscal block features:
  - Anchors public debt accumulation via a fiscal rule for the structural (cyclically-adjusted primary) deficit; provides stock-flow consistency for debt trajectories.
  - Allows analysis of: (i) macro effects of fiscal measures and realistic fiscal multipliers; (ii) public debt projections and required fiscal adjustment; (iii) macro implications of different financing mixes (official/concessional vs private, foreign vs domestic); (iv) fiscal-monetary interactions; (v) long-term implications of fiscal consolidation on prices, growth, debt and risk premium.
- Debt and interest cost modeling:
  - Interest cost of LCY debt formulated as sum of outstanding 1-year maturities adjusted for nominal GDP growth (equation (44)); domestic 1-year rate uses a term-structure average with concessional debt share 푤푐 (equation (45)).
  - Foreign 1-year rate built analogously including foreign term premium and expected country risk premium (equation (47)).
- Debt accumulation and issuance:
  - Total debt-to-GDP: 푑푒푏푡푡푟푎푡 = 푑푒푏푡푡푑,푟푎푡 + 푑푒푏푡푡푓,푟푎푡 (equation (48)).
  - Accumulation rules for domestic and foreign debt detail quarter-by-quarter issuance and adjustments for nominal GDP growth and exchange rate changes (equations (49), (50)).
  - New 1-year issuance split by financing plan 휃 (equations (51)).
- Fiscal targets and reaction:
  - Deficit decomposition: total deficit = primary deficit + interest cost + shock (equation (52)); primary deficit = structural + cyclical (equation (53)).
  - Cyclical deficit linked to output gap: 푑푒푓𝑐𝑦𝑐𝑙𝑒 = −푓1 𝑦̂ + shock (equation (54)).
  - Structural deficit follows a fiscal rule responding to persistence, output gap (푦̂), and expected deviation of debt from target (equation (55)); expected debt deviation is forward-looking (equation (56)).
  - Debt target follows AR process toward steady-state (equation (57)).
  - Fiscal impulse to real economy: 푓𝑖𝑠𝑐𝑖𝑚𝑝 = 푓5 (structural deficit gap) + 푓6 shock (equation (58)).

### Impulse response scenarios and key simulation findings
- Foreign inflation surge:
  - Scenario: one percent shock to foreign (U.S.) inflation in first quarter.
  - U.S. inflation: year-on-year U.S. inflation peaks within one year reaching "about 0.5 percent".
  - Fed raises nominal rate; Jordan follows same increase to maintain peg; domestic inflation rises but less than U.S., real exchange rate depreciates, exports improve, current account improves, central bank accumulates reserves initially, and domestic demand is dampened by tighter policy.
- Oil price increase:
  - Scenario: world oil price increases by "25 percent" over one year.
  - Result: higher inflation via non-core inflation; passthrough of oil is gradual due partly to government stabilized contract prices; food passthrough stronger.
  - Outcome: net exports and current account deteriorate, central bank intervenes (sell reserves), negative output gap opens.
- Drop in domestic demand:
  - Scenario calibrated so output gap reduces by "1 percent".
  - Result: negative output gap lowers prices; under the peg CBJ keeps policy rate aligned with Fed, domestic prices decline improving net exports and current account, which helps close the output gap.
- Domestic cost-push shock:
  - Positive cost-push on core inflation raises domestic prices, reduces export competitiveness, worsens current account; CBJ sells FX reserves to defend peg; output gap falls despite negative real policy rates (nominal rate follows Fed).
- Domestic fiscal stimulus:
  - Scenario: increase in government spending by "1 percent of nominal GDP" over 1 year.
  - Result: larger fiscal multiplier under peg (monetary policy cannot fully offset negative real interest); debt-to-GDP ratio rises and "peaks at about 1 year" after shock; country risk premium increases and central bank raises policy rate; output gap and inflation increase, competitiveness worsens, current account and trade balance deteriorate.

### Model calibration, forecasting, and historical decomposition
- Calibration approach:
  - Parameters grouped into four sets: steady-state parameters (in-sample averages), structural coefficients (micro-foundations and FINEX guidance), non-structural AR processes, and standard deviations of shocks.
- In-sample forecasting (2001:Q1 start):
  - Forecast horizon: up to 6 quarters ahead in exercises; external (foreign) variables assumed known.
  - Performance:
    - Headline inflation: model replicates dynamics well; average around "3 percent".
    - Real GDP growth: model forecasts slightly more volatile than actual data; growth declined from about "6 percent" pre-GFC to "2 percent" after GFC.
    - Interest rate and reserves ratio: forecasts capture actual data well.
  - RMSE comparison: JAM2.0 outperforms or is comparable to a random walk (RW) benchmark for inflation and medium-term horizons for interest rate and reserves; GDP forecasts have higher RMSEs than RW over the horizon examined.
- Historical filtration and shock decomposition:
  - Inflation drivers: headline inflation volatility mainly from non-core (energy) items; core inflation driven largely by foreign and commodity price shocks; supply (cost-push) and foreign/commodity shocks dominated headline inflation deviations in 2022.
  - Output gap and components:
    - Output gap positive prior to GFC, declined thereafter; large negative gap during COVID-19.
    - Domestic demand gap and net exports co-movement: pre-COVID positive output gap driven by net exports (tourism, favorable commodity prices); COVID reversed this.
    - Shocks driving output gap: demand, fiscal policy, and foreign shocks are primary contributors; fiscal block shocks were significant, especially during COVID-19 where policy was countercyclical.
  - Monetary conditions:
    - Real interest rate gaps negative since beginning of 2020 indicating accommodative conditions implied by abroad (peg).
    - Real exchange rate gap shows depreciation since 2019 with part interpreted as trend.
  - Fiscal developments:
    - Government debt-to-GDP rose gradually, "to reach and surpass 100 percent"; sharp increase coinciding with start of COVID-19.
    - Implied term premium for government borrowing rose consistent with increasing debt-to-GDP.
    - Primary deficits rose after the GFC and in 2020 reflecting countercyclical fiscal policy.

### Conclusions and policy implications emphasized in the paper
- JAM2.0 advances a semi-structural QPM tailored to Jordan’s pegged regime with:
  - Disaggregated demand components and multiple Phillips curves.
  - Fiscal block explicitly accounting for currency composition of public debt, enabling nuanced fiscal-monetary interaction analysis.
  - Expanded external sector with FX intervention mechanics tied to UIP and reserves dynamics.
- Practical uses and strengths:
  - JAM2.0 serves as the central forecasting and policy analysis tool at the CBJ, providing medium-term baseline projections and alternative scenarios.
  - Model-generated forecasts outperformed a RW benchmark for several key variables; IRFs align with economic intuition.
  - The model quantifies trade-offs among interest rate policy, FX interventions, and fiscal policy under a peg, aligning with the IMF’s Integrated Policy Framework channels.
- Future extensions recommended:
  - Incorporate real-financial sector linkages, labor market and wage variables, and more detailed public investment linkage to long-run growth as data (e.g., quarterly expenditure-side GDP) becomes available.

*IMF Working Paper: An Extended Quarterly Projection Model for the Central Bank of Jordan (JAM2.0) — content unit excerpt*

### References

### wpiea2023172-print-pdf - References

### References cited
- Adrian, T., C.J. Erceg, , M. Kolasa, J. Lindé, and P. Zabczyk, 2021, "A Quantitative Microfounded Model for the Integrated Policy Framework," IMF Working Paper No. 2021/292 (December).
- Basu, S. S., E. Boz, G. Gopinath, F. Roch, and F. D. Unsal, 2020, "A Conceptual Model for the Integrated Policy Framework," IMF Working Paper No. 2020/121.
- Berg, A. Y., Hul, P., Karam, A., Remo, and D. Rodriguez, 2023, "Forecasting Model of Internal and External Balance," IMF Forthcoming Working Paper.
- Botha, B., Jager, S. d., Ruch, F. and R. Steinbach, 2017, "The Quarterly Projection Model of the SARB," South African Reserve Bank Working Paper No. 2017/21 (September).
- Chen, J., R. A. Espinoza, C. Goncalves, T. Gudmundsson, M. Hengge, Z. Jakab, and J. Lindé, 2022, "Effective Fiscal-Monetary Interactions in Severe Recessions," IMF Working Paper No. 2022/170 (September)
- Cubeddu, L. M., S. Krogstrup, G. Adler, P. Rabanal, M. Dao, and others, 2019, "The External Balance Assessment Methodology: 2018 Update," IMF Working Papers, No. 2019/065 (March).
- Galí, J., and T. Monacelli, 2005, "Monetary Policy and Exchange Rate Volatility in a Small Open Economy," The Review of Economic Studies, Volume 72, Issue 3.
- IMF. (2022). Jordan: 2022 Article IV Consultation. Washington, DC: International Monetary Fund.
- Ireland, P. N., 2004, "Technology Shocks in the New Keynesian Model," NBER Working Paper No. w10309.
- Karam, P., M. Pranovich and J. Vlcek, 2021, " An Extended Quarterly Projection Model: Credit Cycle, Macrofinancial Linkages and Macroprudential Measures: The Case of the Philippines," IMF Working Paper No. 2021/256 (October).
- Mæhle, N., Hlédik, T., Selander, C and M. Pranovich, 2021, "Taking Stock of IMF Capacity Development on Monetary Policy Forecasting and Policy Analysis Systems", IMF Discussion Paper, No. DP/2021/026 (December)
- Morris, S., and H. S. Shin, 1998, "Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks," The American Economic Review, Vol. 88, No. 3.

### Appendix 2: JAM2.0 model equations — major blocks and representative equations
- A.2.1 Real Aggregate Demand
  - Domestic demand gap equation:
    - 푑푑̂ 푡 =푎1 푑푑̂ 푡−1 +푎2 퐸푡 푑푑̂ 푡+1 −푎3 푟̂ 푡 +푎4 푓푖푠̂ 푡 +푎5 푦̂ 푡 +푎6 푟푒푚푖푡̂ 푡 푟푎푡 +푎7 (푟푝푐̂ 푡 푝ℎ표푠 −푟푝푐̂ 푡 표푖푙 )+휀푡 푑푑̂
  - Export gap equation:
    - 푥̂ 푡 =푎8 푥̂ 푡−1 +푎9 푟푒푒푟̂ 푡 +푎10 푦̂ 푡 𝑤 +휀푡 푥̂
  - Import gap equation:
    - 푚̂ 푡 =푎11 푚̂ 푡−1 + (1−푎11)(푎12(푑푑̂ 푡 −푎13 푟푒푒푟̂ 푡)+ (1−푎12)(푥̂ 푡 −푎14 푟푒푒푟̂ 푡 ))+휀푡 푚̂
  - Potential GDP growth:
    - 훥푦̅ 푡 =휌 훥푦̅ 훥푦̅ 푡−1 + (1−휌 훥푦̅ )훥푦 푆푆 +휀푡 훥푦̅
  - Gap and trend identities (examples):
    - 푑푑푡 =푑푑̅̅̅̅ 푡 +푑푑̂ 푡
    - 푦푡 =푦̅ 푡 +푦̂ 푡
  - Annualized q-o-q growth rates (examples):
    - 훥푦 푡 =(푦푡 −푦푡 ) x 4
    - 훥푑푑 푡 =(푑푑푡 − 푑푑𝑡 ) x 4

- A.2.2 Aggregate Supply
  - Headline CPI decomposition:
    - 훥푐푝푖 푡 =푤푐푝푖 훥푐푝푖 푡 𝑐표푟푒 + (1−푤푐푝푖 ) 훥푐푝푖 푡 𝑛푐표푟푒 +휀푡 훥푐푝푖
  - Core inflation Phillips-curve:
    - 훥푐푝푖 푡 𝑐표푟푒 =푏1 훥푐푝푖 푡−1 𝑐표푟푒 + (1−푏1) 퐸푡 훥푐푝푖 푡+1 𝑐표푟푒 +푟푚푐 푡 𝑐표푟푒 +휀푡 훥푐푝푖 𝑐표푟푒
  - Real marginal cost of core inflation:
    - 푟푚푐 푡 𝑐표푟푒 =푏2 푦̂ 푡 +푏3 푟푒푒푟̂ 푡 +푏4 (푟푝푐̂ 푡 표푖푙 +푟푒̂ 푡 )+푏5 (푟푝푐̂ 푡 𝑓표표푑 +푟푒̂ 푡 )−푏6 ( 1 1−푤푐푝푖 )푟푝̂ 푡
  - Non-core inflation Phillips-curve and real marginal cost formulations appear analogously.
  - Nominal GDP definitions and nominal/real deflators included (examples):
    - 푔푑푝 푡 𝑛표푚 =푦 푡 +푑푒푓푙 푡 𝐺𝐷𝑃
    - 훥푔푑푝 푡 𝑛표푚 =(푔푑푝 푡 𝑛표푚 −푔푑푝 푡−1 𝑛표푚 ) x 4

- A.2.3 Real Interest Rate and Exchange Rate
  - Real interest rate identity:
    - 푟 푡 =푖 푡 −퐸 푡 훥푐푝푖 푡+1 𝑐표푟푒
  - Real exchange rate (PPP) identity:
    - 푟푒 푡 =푒 푡 + 푐푝푖 푡 𝑈푆 −푐푝푖 푡 𝑐표푟푒
  - Real uncovered interest rate parity condition:
    - 푟̅ 푡 =푟̅ 푡 𝑈푆 +푝푟푒푚̅̅̅̅̅̅̅ 푡 +퐸 푡 훥푟푒̅̅̅ 푡+1

- A.2.4 Balance of Payments
  - Balance of payment identity:
    - 0=푐푎 푡 𝑟푎푡 +푓푎 푡 𝑟푎푡
  - Current account (ratio form) and components:
    - 푐푎 푡 𝑟푎푡 =푛푥 푡 𝑟푎푡 +푟푒푚푖푡 푡 𝑟푎푡 −푖푛푡푐표푠푡 푡 ∗ 푟푎푡 +표푡ℎ 푡 𝑟푎푡
  - Financial account and private sector net foreign financing position specified with exponential adjustments for exchange rate and nominal GDP changes.

- A.2.5 Monetary Policy
  - CBJ fixed exchange rate rule:
    - 푒 푡 =푒 푡−1
  - CBJ monetary policy rate (UIP condition):
    - 푖 푡 =푖 푡 𝑈푆 +푝푟푒푚 푡 +4 (퐸 푡 𝑒 푡+1 −푒 푡 )+휀푡 푒
  - FXI-rule and FX-reserve accumulation (examples):
    - 푓푥푖 푡 𝑟푎푡 =푔6 푓푥푖 푡−1 𝑟푎푡 + (1−푔6)(푔7 푐푎̂ 푡 𝑟푎푡 −푔8 푓푥𝑟𝑒𝑠̂ 푡 𝑟푎푡𝑖𝑚𝑝 )−푔9 (푖 푡 −푖 푡 𝑈푆 −푝푟푒푚 𝑠𝑠 )+휀푡 푓푥푖 𝑟푎𝑡
    - 푓푥𝑟𝑒𝑠 푡 𝑟푎𝑡 =푓푥푖 푡 𝑟푎𝑡 +푓푥𝑎 ̅̅̅̅̅ 푡 𝑟푎𝑡 + (1+ 푖 푡−1 𝑢𝑠 400 )푓푥𝑟𝑒𝑠 푡−1 𝑟푎𝑡 (1+훥푒 푡 400 )/(1+훥푔푑푝 푡 𝑛표푚 400 )

- A.2.6 Fiscal Policy
  - Total debt service decomposition:
    - 푖푛푡푐표푠푡 푡 𝑟푎푡 =푖푛푡푐표푠푡 푡 𝑑,𝑟푎𝑡 +푖푛푡푐표푠푡 푡 푓,𝑟푎𝑡
  - LCY and FCY debt service and 1Y interest rate constructions given with explicit exponential terms and multi-quarter summations (examples retained verbatim in model).
  - Debt accumulation identities and new issuance rules:
    - Total public debt: 푑푒푏푡 푡 𝑟푎𝑡 =푑푒푏푡 푡 𝑑,𝑟푎𝑡 +푑푒푏푡 푡 푓,𝑟푎𝑡
    - 1Y LCY new debt issuance: 푑푒푏푡1푌 푡 𝑑,𝑟푎푡 =휃 푡 ∙푑푒푓 푡 𝑟𝑎𝑡 +푑푒푏푡1푌 푡−4 𝑑,𝑟푎푡 푒푥푝 (훥푔푑푝 푡 𝑛표푚 +훥푔푑푝 푡−1 𝑛표푚 +훥푔푑푝 푡−2 𝑛표푚 +훥푔푑푝 푡−3 𝑛표푚 400 ) +휀푡 푑푒푏푡1푌 푡 𝑑,𝑟푎푡
  - Fiscal anchor, deficits and reaction functions (examples):
    - Government deficit: 푑푒푓 푡 𝑟푎𝑡 =푝푟푖푚푑푒푓 푡 𝑟푎𝑡 +푖푛푡푐표푠푡 푡 𝑟푎𝑡 +휀푡 푑푒푓 𝑟𝑎𝑡
    - Primary deficit decomposition: 푝푟푖푚푑푒푓 푡 𝑟푎𝑡 =푑푒푓푠푡푟푢푐푡 푡 𝑟𝑎𝑡 +푑푒푓푐푦푐푙푒 푡 𝑟𝑎𝑡
    - Cyclical primary deficit: 푑푒푓푐푦푐푙푒 푡 𝑟𝑎𝑡 =−푓1 푦̂ 푡 +휀푡 푑푒푓푐푦푐푙푒 𝑟𝑎𝑡
  - Fiscal targets for public debt and targeted debt service provided with multi-period constructions (examples retained verbatim).

- A.2.7 Foreign variables
  - Relative prices (oil, food, phosphate) decomposed into trend and gap components:
    - Example: 푟푝푐 푡 표푖푙 =푝푐 푡 표푖푙 −푐푝푖 푡 𝑈푆 and 푟푝푐 푡 표푖푙 = 푟푝푐̂ 푡 표푖푙 +푟푝푐̅̅̅̅̅ 푡 표푖푙
  - US Phillips curve and policy reaction functions:
    - US CPI Phillips curve: 훥푐푝푖 푡 𝑈푆 =푘1 훥푐푝푖 푡−1 𝑈푆 + (1−푘1) 퐸 푡 훥푐푝푖 푡+1 𝑈푆 +푘2 푦̂ 푡 𝑈푆 +휀푡 훥푐푝푖 𝑈푆
    - US FED policy rate rule: 푖 푡 𝑈푆 =푘3 푖 푡−1 𝑈푆 + (1−푘3)(푖̅ 푡 𝑈푆 +푘4 (퐸 푡 훥4 푐푝푖 푡+3 𝑈푆 −훥푐푝푖 𝑈푆,𝑇퐴푅 )+푘5 푦̂ 푡 𝑈푆 )+휀푡 푖 𝑈푆

### Appendix 3: JAM2.0 model parameters
- Appendix 3 lists JAM2.0 model parameters (parameter tables and calibration pages follow in the source document).

*An Extended Quarterly Projection Model for the Central Bank of Jordan — Working Paper No. WP/2023/172*

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_Source: https://www.imf.org/-/media/files/publications/wp/2023/english/wpiea2023172-print-pdf.pdf_