## _wp09191

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---

### Structure of the document
- Section IV describes monetary policy instruments and operations; section V presents the results of the empirical analysis on monetary policy autonomy; and section VI concludes.

### The monetary framework and the impact of the currency crisis
- CBJ establishment and autonomy:
  - The CBJ was established in 1964 with little legal or statutory independence; actual autonomy increased substantially mainly during the 1990s after the balance of payments crisis that devalued the fixed exchange rate by more than 100 percent.
- Pre-crisis monetary framework:
  - Pegged parity to the pound sterling (colonial legacy); sterling peg officially abandoned with the 1967 sterling devaluation and replaced by a peg directly to the USD.
  - In 1975, after the breakdown of the Bretton Woods system, the JD was pegged to the SDR with a band of +/- 2.25 percent (CBJ, 1989).
- External flows and fiscal context (1970s–early 1980s):
  - Foreign grants amounted to 54 percent of revenues in 1975 and until 1983 averaged 42 percent of total government revenues.
  - Remittances amounted to almost 47 percent of GDP in 1979 and averaged 22 percent of GDP annually until 1983.
  - Foreign grants fell from a peak of JD 210 million in 1979 to JD 106 million in 1984.
  - Remittances decreased from JD 456 million (47 percent of GDP) in 1979 to JD 310 million (16 percent of GDP) in 1985.
- External borrowing and debt dynamics:
  - Foreign debt increased by an annual average of 17 percent from 1983 to 1987, reaching a peak of 164 percent of GDP in 1988.
  - If domestic debt included, total government debt would amount to 203 percent of GDP.
  - Interest payments rose from less than 2 percent of GDP in 1983 to almost 11 percent of GDP during 1990-91.
- Real economy and inflation:
  - Real GDP growth: strong from 1976 until 1982 at 13 percent on average; declined to 1.5 percent in 1988; contraction of -10 percent in 1989.
  - Inflation averaged 6 percent during the 1980s.
- Monetary conditions in the 1980s:
  - Broad money growth averaged 13 percent; domestic credit grew at 20 percent annually.
  - Monetary policy largely passive with few instruments: reserve requirements, liquidity ratios, interest rate ceilings.
  - Until 1990 CBJ relied on direct control instruments adjusted frequently to support bank liquidity and encourage credit expansion (IMF, 1995).
- Crisis onset and foreign exchange pressures:
  - Mid-1986: exchange rate exceeded the official 2.25 percent fluctuation band around the SDR; a parallel foreign exchange market appeared.
  - Parallel market premium rose to 20 piastres from 0.2 when first appeared; margin between official and parallel market rates increased rapidly to 200-fold in 1988 (interview with CBJ, 2004).
  - Foreign reserves declined from almost JD 425 million in 1987 to JD 110 million in 1988 (decrease of almost 75 percent).
  - Gold reserves declined by over 30 percent in the same year; arrears in debt service appeared by end-1988 (Kanakria, 2002).
  - April 1988: CBJ suspended currency sales; June 1988: forced devaluation of 5 percent.
- Currency devaluation magnitudes:
  - Devaluation of the exchange rate (measured against SDRs) by 65 percent in 1988 and an additional 33 percent in 1989.
  - JD was re-pegged at JD 0.94/SDR in 1990, representing a devaluation of 140 percent from JD 0.39/SDR before the crisis.
- Causes acknowledged and reforms:
  - Heavy government borrowing to finance current expenditure and associated debt service led to the exchange rate crisis in 1988-89; ministry of finance acknowledged “borrowing from the Central Bank” (Hammour, 2005, p.5).
  - Post-crisis reforms: fiscal discipline and enforcement of limits on central bank financing of the budget deficit increased CBJ’s actual independence and effectiveness, facilitating a more sophisticated monetary framework.

### CBJ independence, legal framework, and monetary policy stance
- Institutional appointment and accountability:
  - Governor and two deputies appointed by the Cabinet subject to the approval of the King for renewable five-year tenures.
  - Remaining five board members appointed by the Cabinet for renewable three-year tenures.
  - All eight board members are appointed by the government without requiring formal consultation or approval by the governor, granting the CBJ very little political independence.
  - CBJ must submit a report of its operations and its balance sheet to the minister of finance within three months of the end of the fiscal year.
- Statutory objectives (1971 law):
  - Maintain monetary stability, ensure convertibility of the JD and promote sustained economic growth according to the general economic policy of the government.
  - Par value of the JD against gold or foreign currency is determined by the Council of Ministers — limiting target/goal independence under the fixed exchange rate regime.
- Degrees of independence under the law:
  - Higher instrument independence: CBJ free to set its discount rate and upper and lower limits for bank borrowing and lending rates and, absent such limits, to make rules and directives to influence interest rate setting and credit expansion.
- Historical limits and actual lending:
  - 1966 law: limited temporary lending to government to cover budget deficits up to 10 percent of average government revenues for the previous three years; allowed CBJ to charge interest on such loans.
  - 1971 law: allowed interest-free loans up to 20 percent of government revenues as projected in the budget law for the year of the advance.
  - In practice, CBJ’s lending systematically exceeded the 20 percent limit since 1980 (CBJ data).
  - From 1983 to 1990, average annual CBJ lending to the government was 52 percent of revenues with a peak of 95 percent in 1989.
  - CBJ staff responses in early 2004 indicated there was no limit on CBJ lending to government during the 1980s; exceptional loans were interpreted as ‘no limits’ on lending.
- Policy stance shifts after the crisis:
  - Late 1988 onward: monetary policy tightened by raising interest rates and reserve ratios.
  - Discount rate raised from 5.75 percent to 7 percent in September 1988 and to 8.5 percent in August 1989.
  - Required reserve ratios on time and savings deposits raised from 6 to 9 percent and reserve ratio on demand deposits from 9 to 11 percent in late 1989.
  - Ceilings on bank deposit rates removed and ceiling on lending rates increased.
  - Interest rate liberalisation in February 1990; lending rate reached 12 percent by September 1990, up from 10.3 earlier in the year.
  - Inflation was 16 percent in 1990, implying negative real interest rates.
  - 1992–1994: further tightening with several reserve requirement increases (IMF, 1995 pp. 44-46).
  - 1991–1992: credit to government and overall domestic credit shrank; money supply grew by only 3 percent.
  - 1990–1993: CBJ stock of foreign exchange reserves almost doubled as reserves were accumulated.
  - 1990–1997: overall domestic credit grew by an average of 5 percent; money supply grew by 6 percent on average.
  - CBJ discount rate reached 9 percent by 1998; commercial banks’ lending rates ranged 12.5-14 percent; inflation dropped to 3 percent implying real interest rate of about 10 percent (CBJ data).
- Fiscal outcomes in the 1990s:
  - 1992: fiscal balance registered a surplus of 1.2 percent excluding grants.
  - By 1999 the fiscal deficit was small.

### Macroeconomic outcomes and historical performance
- Fiscal balance:
  - "2.4  percent  of  GDP  including  grants  and  5.8  percent  without  them."
  - Improvement from pre-crisis averages: "7  percent  and  15  percent  respectively  in  the 1980s."
- Government debt reduction:
  - Total government debt halved from over 200  percent  of GDP in 1989 to 100  percent  of GDP by 1999.
- Inflation and growth series (period averages as presented):
  - Inflation: 5.4 9.7 4.3 2.8 2.4 8.9 (corresponding to Period Average, 1981-85, 1986-1990, 1991-95, 1996-2000, 2001-05, 2006-08 as presented in source).
  - Real GDP growth: 4.7 -0.3 6.3 3.1 6.6 6.7 (corresponding to same periods as above).
- By 1999:
  - Inflation "stood at 1  percent after averaging 4  percent between 1991 and 1999."
  - Real GDP growth was "5  percent on average over the same period."

### Monetary policy instruments, operations, and interest rate path
- Shift to indirect instruments:
  - Early 1990s: adoption of indirect control instruments.
  - September 1993: CBJ introduced an auction system for its own certificates of deposits (CDs).
  - By mid-1995: expanded use of CDs and shifted to using the "CD auction rate" as the operational target; CBJ continued foreign exchange intervention to maintain the exchange rate peg.
  - After 1995: intermediate target changed from M2 to banking system interest rates.
- Instrument set and timeline:
  - CBJ influences CD interest rates by varying auction offerings; responsiveness of retail interest rates to CDs declined in recent years.
  - "3-month CD interest rate" maintained between "9  and  9.55  percent" from 1995 to 1998 during tight policy.
  - 1994: introduction of 7-day repo facility (used as ceiling).
  - 1998: launched overnight deposit facility to manage daily liquidity and provide a floor for inter-bank rates.
  - 2000: CBJ started adjusting overnight rate in line with changes in the US Federal funds rate.
  - Since 2000: moved toward a corridor system with overnight window as floor and the 7-day repo as ceiling.
  - May 2007: reduced corridor width by "125 basis points" and replaced the seven-day repo with an overnight facility.
- Interest rate levels and trends:
  - CBJ policy rate: "6  percent in 2000" and "fell to 3.9 in 2001" despite U.S. Federal funds rate increase of "1.27 percentage  points."
  - Decoupling in 2007–early 2008: CBJ kept interest rates considerably higher than in the US due to pass-through of food and fuel price shocks and balance of payments concerns after late 2008.
  - By 1999 average 3-month CD rate reduced to "6  percent" from "9.5  percent in 1998," continuing to "2.9  percent in 2004."
  - Discount rate: "3.8  percent  in  2004," down from "9  percent  in  1998."
  - Starting in 2005 CBJ reversed declining interest rate trend due to high credit growth and inflationary pressures in 2006.
- Operational observations:
  - Poddar (2006): CBJ had some independence in setting interest rate spreads relative to the US because of imperfect asset substitutability.

### Public debt law, government securities market, and sterilization
- 2001 public debt law key provisions:
  - Prohibited government direct domestic borrowing from commercial banks or other institutions; limited domestic borrowing to issuing securities.
  - Froze government debt to the CBJ at the stock outstanding in April 2001.
  - Articles 21-23 limited stock of both foreign and domestic debt at any point in time to "60  percent  of GDP each" and limited total outstanding public debt to "80  percent  of GDP  at current prices of the latest year for which data is available."
  - Public debt ceiling in the 2001 law "is expected to be reached by 2011 through fiscal adjustment and the" (sentence as presented).
- 2008 Memorandum of Understanding (MoU) between CBJ and Ministry of Finance (March 2008):
  - Eliminated interest-free overdraft facility at the CBJ.
  - Set strategy for settlement of the overdrawn balance by securitizing the debt and sharing government borrowing plans with the CBJ on a quarterly basis.
- Government securities market and composition:
  - Government securities (bills and bonds) stock: JD 330 million in 1999 → JD 1500 million in 2004 → JD 4133 million by October 2008 (CBJ data).
  - Government issuance of bills and bonds represents 62 percent of the total stock of domestic debt outstanding, amounting to JD 5.3bn ($7.5bn).
  - Composition of domestic debt outstanding:
    - Government securities (bills and bonds): 62 percent
    - CDs issued by the CBJ: 32 percent
    - Corporate securities: 4 percent
    - Bonds issued by public entities: 2 percent
    - Development bonds: less than 1 percent
  - In 2008, treasury bonds (T-bonds) accounted for about 80 percent of the government’s domestic debt; T-bills constituted the rest.
  - T-bonds maturities: 3- and 5-year; average remaining maturity roughly 2 years; weighted average yield of 7.4 percent.
  - T-bills: currently issued at a 1-year maturity; CDs issued at 3- and 6-month maturities, typically bi-weekly.
  - Market holders:
    - Banks hold about 94 percent of the T-bill market and 65 percent of the T-bond market.
    - Social Security Corporation (SSC) holds 4 percent of T-bills and 28 percent of T-bonds.
    - A much smaller percentage held by corporate savings plans.
  - Issuance method: multiple (or discriminatory) price auction; banks, the SSC and other financial companies eligible to bid directly; other investors must channel bids through a bank.
- Demand, rates, and sterilization costs:
  - Strong demand from banks due to relatively high returns.
  - Short-term T-bills offered over 100 basis points more than the deposit window rate at the central bank in early 2008.
  - Rates on government securities typically higher than CDs; in absence of alternatives banks hold government securities to maturity.
  - Cost consideration: using T-bills to borrow directly from banks could lower total borrowing cost when considering direct foreign borrowing cost and sterilization costs; sterilization costs reduce CBJ profits and weaken its balance sheet.
- CBJ sterilization and liquidity management:
  - In 2002, CBJ started reducing the stock of CDs on offer to contain sterilization costs due to losses on CDs.
  - Reducing CDs redirected excess banking-system liquidity to the overnight deposit window at almost the same interest rate.
  - CBJ response: reduce both the volume of CDs and the overnight interest rate to channel excess liquidity back to CDs at lower cost.
  - Medium-term suggestion: replace CBJ CDs with government T-bills as a monetary management tool; introduce a short-term T-bill (perhaps 3-month bills) to allow open-market operations, requiring coordination between CBJ and Ministry of Finance.

### Monetary policy autonomy: empirical framework, VECM results, and interpretation
- Concept and data:
  - Monetary independence defined by the ability to respond to domestic objectives given influence of world interest rates.
  - Quarterly data from 1999 to 2008.
  - Variables: inflation differential (π) and standardized output gap differential (y) between Jordan and the US; domestic interest rate r (r_Jor) and US interest rate r* (r_US).
- Cointegration (long-run relation) presented (coefficients and T-stats as in source):
  - yrr
    )1.9()8.17()9.26(
    77.083.074.039.1
    *
    
  - Policy rate in Jordan responds to changes in the US interest rate and to domestic variables (inflation and output gap differentials).
- VECM estimation details:
  - Lag length identified by Akaike criteria.
  - Error correction (speed of adjustment δ) estimated at 0.5.
  - Short-run dynamics: most lagged coefficients statistically insignificant except first lag of inflation differential and output gap differential significant at the 5 percent level.
  - Selected exact VECM coefficients and statistics as presented:
    - Cointegrating Equation coefficients:
      - r_US(-1) -0.736006 [-26.8556]
      - π (-1) -0.834533 [-17.8792]
      - y (-1) -0.766947 [-9.07574]
      - C -1.399098
    - Error correction term: -0.498103 [-2.08138]
    - Significant short-run coefficients (first lags):
      - D(π (-1)) -0.339432 [-2.01728]
      - D(y (-1)) -0.30641 [-2.06503]
    - Model fit:
      - R-squared 0.779269
      - Adj. R-squared 0.642626
      - F-statistic 5.702961
- Impulse responses and variance decomposition (exact findings preserved):
  - Domestic policy rate responds gradually to innovations in US interest rates, peaking at about 7 quarters before fading.
  - Response to the inflation differential is initially stronger, peaking at the fourth quarter.
  - Policy reaction to the output gap differential appears small.
  - Variance decomposition (policy rate variance explained by shocks over 10 quarters) preserved exactly as presented:
    - Period 1: r_Jor 100.00 r_US 0.00 π 0.00 y 0.00
    - Period 2: r_Jor 80.4894 r_US 4.6534 π 6.1 90.50
    - Period 3: r_Jor 70.656 r_US 4.4921 π 21.1012 y 2.20
    - Period 4: r_Jor 60.904 r_US 3.1738 π 38.1716 y 1.68
    - Period 5: r_Jor 51.123 r_US 3.3447 π 47.3417 y 1.67
    - Period 6: r_Jor 41.322 r_US 7.3152 π 52.7418 y 1.60
    - Period 7: r_Jor 31.542 r_US 3.1156 π 56.0418 y 2.17
    - Period 8: r_Jor 21.751 r_US 19.8857 π 57.1220 y 2.35
    - Period 9: r_Jor 11.941 r_US 18.0757 π 57.0922 y 2.32
    - Period 10: r_Jor 2.091 r_US 16.8356 π 56.7724 y 2.08
    - Cholesky Ordering: r_Jor, r_US, π, y
- Interpretation and comparative context:
  - Influence of US interest rates on Jordanian policy is present but smaller than in some other fixed-exchange-rate emerging markets; speed of adjustment relatively high.
  - Prior studies summarized in source:
    - Frankel et al. (2002): long-run coefficients on US interest rate averaged 1.81 for fixed regimes, 0.81 for intermediate, 0.91 for freely floating (1990s panel).
    - Maziad (2008): long-run coefficient on US interest rate averaged 1.5 for fixed exchange rate episodes; speed of adjustment averaged 0.3.
  - Asymmetry caveat: easier to keep domestic interest rates above US rates than to lower them below US rates due to inflation expectations, potential reserve losses, and credibility of the peg.
  - Correlation of output gaps:
    - Over the study period, output gaps in the US and Jordan were positively correlated with a correlation coefficient of 25 (t-statistic 1.55).
    - A seasonally adjusted Jordan output gap series showed a correlation coefficient of 0.67 (t-statistic: 5.54).

### Policy implications and recommendations (preserved exactly as presented)
- Enhance coordination between the CBJ and the Ministry of Finance to:
  - Introduce short-term government T-bills (perhaps 3-month bills) to allow the CBJ to conduct open-market operations.
  - Replace CBJ CDs with government T-bills for monetary management to reduce combined borrowing and sterilization costs and support secondary market development.
- Continue fiscal consolidation and improve public debt management capacity to complement CBJ’s monetary operations.
- Given the CBJ’s track record in maintaining low and stable inflation with a fixed exchange rate, consider medium-term evaluation of transition options to a more flexible monetary framework (e.g., an inflation targeting framework) if authorities wish to grant greater operational independence to the CBJ.

*Source: content from the provided IMF document excerpt.*

### section  IV  describes  monetary  policy  instruments  and  operations;  section  V  presents  the

### _wp09191 - section  IV  describes  monetary  policy  instruments  and  operations;  section  V  presents  the

### Structure of the document
- Section IV describes monetary policy instruments and operations; section V presents the results of the empirical analysis on monetary policy autonomy; and section VI concludes.

### The monetary framework and the impact of the currency crisis
- The CBJ was established in 1964 with little legal or statutory independence; actual autonomy increased substantially mainly during the 1990s after the balance of payments crisis that devalued the fixed exchange rate by more than 100 percent.
- Pre-crisis monetary framework:
  - Pegged parity to the pound sterling (colonial legacy); sterling peg officially abandoned with the 1967 sterling devaluation and replaced by a peg directly to the USD.
  - In 1975, after the breakdown of the Bretton Woods system, the JD was pegged to the SDR with a band of +/- 2.25 percent (CBJ, 1989).
- External flows and fiscal context (1970s–early 1980s):
  - Foreign grants amounted to 54 percent of revenues in 1975 and until 1983 averaged 42 percent of total government revenues.
  - Remittances amounted to almost 47 percent of GDP in 1979 and averaged 22 percent of GDP annually until 1983.
  - Foreign grants fell from a peak of JD 210 million in 1979 to JD 106 million in 1984.
  - Remittances decreased from JD 456 million (47 percent of GDP) in 1979 to JD 310 million (16 percent of GDP) in 1985.
- External borrowing and debt dynamics:
  - Foreign debt increased by an annual average of 17 percent from 1983 to 1987, reaching a peak of 164 percent of GDP in 1988.
  - If domestic debt included, total government debt would amount to 203 percent of GDP.
  - Interest payments rose from less than 2 percent of GDP in 1983 to almost 11 percent of GDP during 1990-91.
- Real economy and inflation:
  - Real GDP growth: strong from 1976 until 1982 at 13 percent on average; declined to 1.5 percent in 1988; contraction of -10 percent in 1989.
  - Inflation averaged 6 percent during the 1980s.
- Monetary conditions in the 1980s:
  - Broad money growth averaged 13 percent; domestic credit grew at 20 percent annually.
  - Monetary policy largely passive with few instruments: reserve requirements, liquidity ratios, interest rate ceilings.
  - Until 1990 CBJ relied on direct control instruments adjusted frequently to support bank liquidity and encourage credit expansion (IMF, 1995).
- Crisis onset and foreign exchange pressures:
  - Mid-1986: exchange rate exceeded the official 2.25 percent fluctuation band around the SDR; a parallel foreign exchange market appeared.
  - Parallel market premium rose to 20 piastres from 0.2 when first appeared; margin between official and parallel market rates increased rapidly to 200-fold in 1988 (interview with CBJ, 2004).
  - Foreign reserves declined from almost JD 425 million in 1987 to JD 110 million in 1988 (decrease of almost 75 percent).
  - Gold reserves declined by over 30 percent in the same year; arrears in debt service appeared by end-1988 (Kanakria, 2002).
  - April 1988: CBJ suspended currency sales; June 1988: forced devaluation of 5 percent.
- Currency devaluation magnitudes:
  - Devaluation of the exchange rate (measured against SDRs) by 65 percent in 1988 and an additional 33 percent in 1989.
  - JD was re-pegged at JD 0.94/SDR in 1990, representing a devaluation of 140 percent from JD 0.39/SDR before the crisis.
- Causes acknowledged:
  - Heavy government borrowing to finance current expenditure and associated debt service led to the exchange rate crisis in 1988-89; ministry of finance acknowledged “borrowing from the Central Bank” (Hammour, 2005, p.5).
- Post-crisis reforms and implications:
  - Fiscal discipline and enforcement of limits on central bank financing of the budget deficit were critical reforms that increased CBJ’s actual independence and effectiveness.
  - These reforms facilitated evolution of a more sophisticated monetary framework and greater central bank independence, supported by increased fiscal discipline.

### CBJ independence and monetary policy
- Institutional appointment and accountability:
  - Governor and two deputies appointed by the Cabinet subject to the approval of the King for renewable five-year tenures.
  - Remaining five board members appointed by the Cabinet for renewable three-year tenures.
  - All eight board members are appointed by the government without requiring formal consultation or approval by the governor, granting the CBJ very little political independence.
  - CBJ must submit a report of its operations and its balance sheet to the minister of finance within three months of the end of the fiscal year.
- Statutory objectives (1971 law):
  - Maintain monetary stability, ensure convertibility of the JD and promote sustained economic growth according to the general economic policy of the government.
  - Par value of the JD against gold or foreign currency is determined by the Council of Ministers — limiting target/goal independence under the fixed exchange rate regime.
- Degrees of independence:
  - The law grants higher instrument independence: CBJ free to set its discount rate and upper and lower limits for bank borrowing and lending rates and, absent such limits, to make rules and directives to influence interest rate setting and credit expansion.
- Historical limits on central bank lending to government:
  - 1966 law: limited temporary lending to government to cover budget deficits up to 10 percent of average government revenues for the previous three years; allowed CBJ to charge interest on such loans.
  - 1971 law: allowed interest-free loans up to 20 percent of government revenues as projected in the budget law for the year of the advance.
  - In practice, CBJ’s lending systematically exceeded the 20 percent limit since 1980 (CBJ data).
  - From 1983 to 1990, average annual CBJ lending to the government was 52 percent of revenues with a peak of 95 percent in 1989.
  - CBJ staff responses in early 2004 indicated there was no limit on CBJ lending to government during the 1980s; exceptional loans were interpreted as ‘no limits’ on lending.
- Policy stance shifts after the crisis:
  - Late 1988 onward: monetary policy tightened by raising interest rates and reserve ratios.
  - Discount rate raised from 5.75 percent to 7 percent in September 1988 and to 8.5 percent in August 1989.
  - Required reserve ratios on time and savings deposits raised from 6 to 9 percent and reserve ratio on demand deposits from 9 to 11 percent in late 1989.
  - Ceilings on bank deposit rates removed and ceiling on lending rates increased.
  - Interest rate liberalisation in February 1990; lending rate reached 12 percent by September 1990, up from 10.3 earlier in the year.
  - Inflation was 16 percent in 1990, implying negative real interest rates.
  - 1992–1994: further tightening with several reserve requirement increases (IMF, 1995 pp. 44-46).
  - 1991–1992: credit to government and overall domestic credit shrank; money supply grew by only 3 percent.
  - 1990–1993: CBJ stock of foreign exchange reserves almost doubled as reserves were accumulated.
  - 1990–1997: overall domestic credit grew by an average of 5 percent; money supply grew by 6 percent on average.
  - CBJ discount rate reached 9 percent by 1998; commercial banks’ lending rates ranged 12.5-14 percent; inflation dropped to 3 percent implying real interest rate of about 10 percent (CBJ data).
- Fiscal outcomes in the 1990s:
  - 1992: fiscal balance registered a surplus of 1.2 percent excluding grants.
  - By 1999 the fiscal deficit was small.

*Source: content from the provided IMF document excerpt.*

### 2.4  percent  of  GDP  including  grants  and  5.8  percent  without  them,  which  is  a  significant

### _wp09191 - 2.4  percent  of  GDP  including  grants  and  5.8  percent  without  them,  which  is  a  significant

### Macroeconomic outcomes and historical performance
- Fiscal balance: "2.4  percent  of  GDP  including  grants  and  5.8  percent  without  them."
- Improvement from pre-crisis averages: "7  percent  and  15  percent  respectively  in  the 1980s."
- Total government debt reduction: "halved from over 200  percent  of  GDP  in  1989  to  100  percent  of  GDP  by  1999."
- Impact of policy mix: tightening of monetary policy and fiscal deficit control enabled maintenance of the fixed exchange rate, stable low inflation, and sustainable growth.
- Table 1: Macroeconomic Developments (period averages and series as presented)
  - Period Average categories and values as given:  
    - Inflation: 5.4 9.7 4.3 2.8 2.4 8.9 (presented in the source as a concatenated series corresponding to Period Average, 1981-85, 1986-1990, 1991-95, 1996-2000, 2001-05, 2006-08)
    - Real GDP growth: 4.7 -0.3 6.3 3.1 6.6 6.7 (presented in the source as a concatenated series corresponding to the same periods)
- By 1999: inflation "stood at 1  percent after averaging 4  percent between 1991 and 1999," while "real GDP growth was 5  percent on average over the same period."

### Central Bank of Jordan (CBJ) independence and legal framework
- Enhanced actual independence due to:
  - Introduction of indirect control instruments improving CBJ's ability to conduct monetary policy.
  - CBJ advising against chronic fiscal deficits and excessive monetization prior to the crisis; authorities later judged that heeding CBJ advice might have reduced crisis likelihood/cost.
- Legal and institutional changes improving operational independence:
  - New public debt law in 2001 instituted ceilings on public debt and tightened limits on government borrowing from the central bank, enhancing CBJ's actual independence.
  - Amendment to Article 25 of the central bank law requiring consultation with the central bank when the Cabinet determines the par value of the currency.
  - New law established a public debt management committee of three members (including the governor of the CBJ, the minister of planning, and the minister of finance as chair) and required Committee approval for minister of finance borrowing on behalf of the government.
  - Article 11: minister of finance "shall decide on the annual plan for issues of public debt and determine the terms of issue upon consultation with the Governor."
- Measures of independence from external studies:
  - Bank of England survey (2000): CBJ attained the full score of "100" on overall instrument and target independence indicators; composite index score "75  out  of  100."
  - Table 2: Bank of England CBI Index — scores (max. 100) as presented:
    - Egypt: 53
    - Jordon: 74
    - Lebanon: 68
    - Turkey: 70
    - Emerging Market Average: 65
  - Gisolo (2008) legal-independence based study:
    - CBJ overall score: "-0.25"
    - Sample average score: "1.92"
    - Maximum score in sample (Algeria): "4.25"
    - Gisolo's ranking driven by low/negative political independence scores related to hiring/dismissal provisions for the governor and the board.

### Monetary policy instruments and operations
- Shift in operational framework:
  - Early 1990s: adoption of indirect control instruments.
  - September 1993: CBJ introduced an auction system for its own certificates of deposits (CDs).
  - By mid-1995: expanded use of CDs and shifted to using the "CD auction rate" as the operational target; CBJ continued foreign exchange intervention to maintain the exchange rate peg.
  - After 1995: intermediate target changed from M2 to banking system interest rates.
- Instrument set and evolution:
  - CBJ influences CD interest rates by varying auction offerings; effect on retail interest rates noted though responsiveness declined in recent years.
  - "3-month CD interest rate" maintained between "9  and  9.55  percent" from 1995 to 1998 during tight policy.
  - 1994: introduction of 7-day repo facility (used as ceiling).
  - 1998: launched overnight deposit facility to manage daily liquidity and provide a floor for inter-bank rates.
  - 2000: CBJ started adjusting overnight rate in line with changes in the US Federal funds rate.
  - Since 2000: moved toward a corridor system with overnight window as floor and the 7-day repo as ceiling.
  - May 2007: simplified interest rate structure by reducing the corridor width by "125 basis points" and replacing the seven-day repo with an overnight facility to ensure symmetry.
- Interest rate levels and trends:
  - CBJ policy rate remained stable at "6  percent in 2000" and "fell to 3.9 in 2001" despite the increase in the federal funds rate of "1.27 percentage  points."
  - Decoupling trend: CBJ kept interest rates considerably higher than in the US during 2007–early 2008 due to pass-through of food and fuel price shocks and to avoid balance of payments pressure after the global financial crisis outbreak in late 2008.
  - By 1999 average 3-month CD rate reduced to "6  percent" from "9.5  percent in 1998," continuing to decline to "2.9  percent in 2004."
  - Discount rate: "3.8  percent  in  2004," down from "9  percent  in  1998."
  - Starting in 2005, CBJ reversed declining interest rate trend due to concerns over high credit growth and inflationary pressures in 2006.
- Operational observations:
  - Poddar (2006) argued CBJ had some independence in setting interest rate spreads relative to the US because of imperfect asset substitutability; further empirical analysis referenced to be discussed in section V.
  - Chart 1: presented CD Rate and Fed. Funds Rate evolution (time series from 1999Q1 through 2008Q3) showing the relationship and episodes of decoupling.

### Public debt law, fiscal coordination, and implications for liquidity management
- 2001 public debt law main features:
  - Prohibited government direct domestic borrowing from commercial banks or other institutions; limited domestic borrowing to issuing securities.
  - Froze government debt to the CBJ at the stock outstanding in April 2001 (time of law entry into force).
  - Articles 21-23 limited stock of both foreign and domestic debt at any point in time to "60  percent  of GDP each" and limited total outstanding public debt to "80  percent  of GDP  at current prices of the latest year for which data is available."
  - Public debt ceiling in the 2001 law "is expected to be reached by 2011 through fiscal adjustment and the" (sentence as presented in source).
- Subsequent coordination and reforms:
  - Memorandum of Understanding (MoU) between CBJ and Ministry of Finance in "March 2008":
    - Eliminated interest-free overdraft facility at the CBJ that had funded short-term government cash needs.
    - Set a clear strategy for settlement of the overdrawn balance by securitizing the debt and sharing government borrowing plans with the CBJ on a quarterly basis to coordinate liquidity management.
- Outcomes and significance:
  - The 2001 law and the 2008 MoU enhanced CBJ's actual independence by prohibiting direct lending to the government and improving coordination on debt issuance and liquidity management.
  - High foreign reserves by end-1999 (reaching "seven  months  of  imports") signaled confidence in the JD and enabled CBJ to lower CD interest rates.

*Source: Excerpt from the provided IMF content unit.*

### introduction  of  new  debt  instrument,  as  well  as  improving  the  capacity  of  public  debt

### _wp09191 - introduction  of  new  debt  instrument,  as  well  as  improving  the  capacity  of  public  debt

### Public debt structure and government securities market
- Government securities (bills and bonds) stock grew from JD 330 million in 1999 to JD 1500 million in 2004, and reached 4133 million by October 2008 (CBJ data).
- Government issuance of bills and bonds represents 62 percent of the total stock of domestic debt outstanding, amounting to JD 5.3bn ($7.5bn).
- Composition of domestic debt outstanding:
  - Government securities (bills and bonds): 62 percent
  - CDs issued by the CBJ: 32 percent
  - Corporate securities: 4 percent
  - Bonds issued by public entities: 2 percent
  - Development bonds: less than 1 percent
- In 2008, treasury bonds (T-bonds) accounted for about 80 percent of the government’s domestic debt; T-bills constituted the rest.
- T-bonds are issued at 3- and 5-year maturities; the average remaining maturity on the current stock of T-bonds is roughly 2 years, with a weighted average yield of 7.4 percent.
- T-bills are currently issued at a 1-year maturity; CDs are issued at 3- and 6-month maturities, typically on a bi-weekly basis.
- Market holders:
  - Banks hold about 94 percent of the T-bill market and 65 percent of the T-bond market.
  - Social Security Corporation (SSC) holds 4 percent of T-bills and 28 percent of T-bonds.
  - A much smaller percentage is held by corporate savings plans.
- Issuance method and eligibility:
  - Public debt securities are issued using a multiple (or discriminatory) price auction.
  - Banks, the SSC and other financial companies (including insurance companies) are eligible to bid directly; other investors must channel bids through a bank.

### Demand, rates, and incentives for domestic borrowing
- Strong demand for government securities from the banking sector due to relatively high returns.
- Short-term T-bills offered over 100 basis points more than the deposit window rate at the central bank in early 2008.
- Rates on government securities are typically higher than CDs. In the absence of other alternative investments, commercial banks tend to hold government securities to maturity.
- Historical financing mix:
  - Since early 2000s, share of foreign currency debt fell from over 80 percent of total debt in 2001 to below 50 percent in 2008.
  - Government historically relied on concessional foreign debt and borrowing from the CBJ to finance the budget deficit.
- Cost considerations:
  - Using T-bills to borrow directly from the banking system could lower the total cost of borrowing if one considers both the direct cost of borrowing abroad and the cost of sterilization using CDs.
  - The government initially reluctant because sterilization costs do not appear directly in its balance sheet and are borne by the CBJ; in practice sterilization costs reduce CBJ profits and weaken its balance sheet.

### Central Bank sterilization and liquidity management
- In 2002, the CBJ started to reduce the stock of CDs on offer to contain the cost of sterilization, as it had been making losses issuing CDs.
- Reducing CDs redirected excess banking-system liquidity to the overnight deposit window at almost the same interest rate, potentially more costly to the CBJ because overnight deposits are very liquid and allow banks to reduce frictional balances.
- CBJ response: reduce both the volume of CDs and the overnight interest rate (which sets the floor for the CD rate determined by auction), channeling excess liquidity back to CDs at lower cost to the CBJ.
- Medium-term operational suggestion:
  - Replace CBJ CDs with government T-bills as a monetary management tool.
  - Introduction of a short-term T-bill (perhaps 3-months bills) could allow the CBJ to conduct open-market operations, requiring close coordination between the CBJ and the Ministry of Finance.
  - Expected benefits: reduce combined cost of borrowing and sterilization; contribute to development of a secondary bond market.

### Coordination between fiscal and monetary authorities
- Evolution from a subordinate CBJ in the 1980s to increased discipline of fiscal policy necessitates greater coordination between government and CBJ.
- Elimination of the government’s overdraft facility at the CBJ increases government reliance on short-term T-bills to replace the overdraft, reinforcing the need for coordination.

### Monetary policy autonomy: framework and definition
- Flexible exchange rates are not automatically enabling for independent monetary policy; monetary independence is determined by influence of world interest rates on domestic interest rates.
- Jordan has operated a fixed exchange rate to the USD since 1995, providing a credible anchor and aiding price stability and foreign capital attraction.
- Definition of monetary independence used: ability to respond to domestic objectives while acknowledging that world interest rates matter increasingly as emerging markets integrate into the global economy (as put forward in earlier work).

### Empirical analysis: cointegration, VECM, and impulse responses
- Data and variables:
  - Quarterly data from 1999 to 2008.
  - Domestic variables: inflation differential (π) and standardized output gap differential (y) between Jordan and the US.
  - Domestic interest rate r (r_Jor) and US interest rate r* (r_US).
  - Output gap: residual from regressing GDP on linear and quadratic trend, standardized by series standard deviation.
- Cointegration result:
  - A long-run cointegrating relation was found:
    yrr
    )1.9()8.17()9.26(
    77.083.074.039.1
    *
    
    - T-stats provided in parentheses in the source.
  - Policy rate in Jordan responds to changes in the US interest rate and to domestic variables (inflation and output gap differentials).
- VECM specification and estimation:
  - VECM estimated with lag length identified by Akaike criteria.
  - Error correction (speed of adjustment δ) estimated at 0.5.
  - Short-run dynamics: coefficients on most lagged variables statistically insignificant except first lag of inflation differential and output gap differential significant at the 5 percent level.
- Impulse response findings:
  - Domestic policy rate responds gradually to innovations in US interest rates, peaking at about 7 quarters before fading.
  - Response to the inflation differential is initially stronger, peaking at the fourth quarter.
  - Policy reaction to the output gap differential appears small.
- Variance decomposition (policy rate variance explained by shocks over 10 quarters):
  - In the second quarter, innovations to US interest rates explain about 3.5 percent of the variance in the domestic interest rate.
  - US interest rates’ contribution reaches a peak of 57 percent after 8 quarters.
  - Domestic variables (inflation and output gap differentials combined) explain about 17 percent of the variation in domestic interest rates by the fourth quarter.
- VECM estimation table (selected exact results as presented):
  - Cointegrating Equation coefficients (with T-stats in source):
    - r_US(-1) -0.736006 [-26.8556]
    - π (-1) -0.834533 [-17.8792]
    - y (-1) -0.766947 [-9.07574]
    - C -1.399098
  - Error correction term: -0.498103 [-2.08138]
  - Significant short-run coefficients (first lags):
    - D(π (-1)) -0.339432 [-2.01728]
    - D(y (-1)) -0.30641 [-2.06503]
  - Model fit:
    - R-squared 0.779269
    - Adj. R-squared 0.642626
    - F-statistic 5.702961
- VECM variance decomposition table (period-by-period percentages from source):
  - Period 1: r_Jor 100.00 r_US 0.00 π 0.00 y 0.00
  - Period 2: r_Jor 80.4894 r_US 4.6534 π 6.1 90.50 (note: preserved as in source table layout)
  - Period 3: r_Jor 70.656 r_US 4.4921 π 21.1012 y 2.20
  - Period 4: r_Jor 60.904 r_US 3.1738 π 38.1716 y 1.68
  - Period 5: r_Jor 51.123 r_US 3.3447 π 47.3417 y 1.67
  - Period 6: r_Jor 41.322 r_US 7.3152 π 52.7418 y 1.60
  - Period 7: r_Jor 31.542 r_US 3.1156 π 56.0418 y 2.17
  - Period 8: r_Jor 21.751 r_US 19.8857 π 57.1220 y 2.35
  - Period 9: r_Jor 11.941 r_US 18.0757 π 57.0922 y 2.32
  - Period 10: r_Jor 2.091 r_US 16.8356 π 56.7724 y 2.08
  - Cholesky Ordering: r_Jor, r_US, π, y
  - Note: table entries are preserved exactly as presented in the source.

### Comparative context and asymmetry caveat
- Compared with other emerging markets operating fixed exchange rates, the influence of US interest rates on Jordanian policy is smaller while the speed of adjustment is relatively high.
- Prior studies referenced (results summarized in source):
  - Frankel et al. (2002): long-run coefficients on US interest rate averaged 1.81 for fixed regimes, 0.81 for intermediate, 0.91 for freely floating regimes (1990s panel of 46 countries).
  - Maziad (2008): in a sample of 19 emerging markets (1990–2005), long-run coefficient on US interest rate averaged 1.5 for fixed exchange rate episodes; speed of adjustment averaged 0.3.
- Asymmetry caveat: Jordan may find it easier to keep domestic interest rates above US rates than to lower them below US rates due to inflation expectations, potential reserve losses, and credibility of the peg.
- Correlation of output gaps:
  - Over the study period, output gaps in the US and Jordan were positively correlated with a correlation coefficient of 25 (t-statistic 1.55).  
  - A seasonally adjusted Jordan output gap series showed a correlation coefficient of 0.67 (t-statistic: 5.54).

### Policy implications and recommendations
- Enhance coordination between the CBJ and the Ministry of Finance to:
  - Introduce short-term government T-bills (perhaps 3-month bills) to allow the CBJ to conduct open-market operations.
  - Replace CBJ CDs with government T-bills for monetary management to reduce combined borrowing and sterilization costs and support secondary market development.
- Continue fiscal consolidation and improve public debt management capacity to complement CBJ’s monetary operations.
- Given the CBJ’s track record in maintaining low and stable inflation with a fixed exchange rate, consider medium-term evaluation of transition options to a more flexible monetary framework (e.g., an inflation targeting framework) if authorities wish to grant greater operational independence to the CBJ.

*Source: _wp09191 - introduction  of  new  debt  instrument,  as  well  as  improving  the  capacity  of  public  debt (IMF PDF content provided).*

### References

### _wp09191 - References

### Academic and Policy Studies
- Abu-Hammour, Mohamed (2005). Jordan’s Economic Reform (speech), Eighth Annual Meeting of Middle Eastern and North African Bank Chief Executives, February, Abu Dhabi
- Bofinger, Peter (2001). Monetary Policy: Goals, Institutions, Strategies, and Instruments, Oxford University Press.
- Brynen, Rex (1992). ‘Economic Crisis and Post-Rentier Democratization in the Arab World’, Canadian Journal of Political Science, March 1992, pp. 69-97.
- Carroll, Katherine (2003). Business as Usual? Economic Reform in Jordan, Lexington Books.
- Cukierman, A. (1992). Central Bank Strategy, Credibility and Autonomy, Cambridge, Massachusetts: MIT Press
- Gisolo, E. (2008). ‘The degree of legal central bank independence in MENA countries’ in Cobham and Dibeh (ed.) Monetary Policy and Central Banking in the Middle East and North Africa, Routledge.
- Grilli, V., D. Masciandaro and G. Tabellini (1991). “Political and Monetary Institutions and Public Financial Policies in the Industrial Countries,” Economic Policy, Vol. 13, pp. 341-92
- Kanakria, Ezz el-Din (2002). Economic Reform Programs in Jordan and its Impact on Public Finance, Arab University of Jordan, Unpublished papar (Arabic).
- Maziad, Samar (2008). Monetary Frameworks in Emerging Market Countries: Exchange Rate Arrangements and Central Bank Independence, Ph.D. Dissertation, School of Economics and Finance, University of St. Andrews, Scotland, UK
- Satloff, Robert (1992). ‘Jordan’s Great Gamble: Economic Crisis and Political Reform’ in Barkey, Henri J. (ed.) The Politics of Economic Reform in the Middle East, St. Marin’s Press, New York.

### IMF Publications and Country Reports
- International Monetary Fund (1995). Jordan – Background Information on Selected Aspects of Adjustment and Growth Strategy, IMF Staff Country Report No. 95/97
- International Monetary Fund (2002). Article IV Consultation with Jordan Public Information Notice, IMF Public Information Notice No. 02/51
- International Monetary Fund (2004). Article IV Consultation and Second Review under the Stand-By Agreement – Staff Report, IMF Country Report No. 04/122, May
- International Monetary Fund (2005). Jordan: Fifth Post-Program Monitoring Discussions – Staff Report, IMF Country Report No. 05/100, March
- International Monetary Fund (2007). Jordan: Post-Program Monitoring Discussions – Staff Report, IMF Country Report No. 07/284
- International Monetary Fund (2008). Article IV Consultation, IMF Country Report No. 08/291
- International Monetary Fund (2009). Article IV Consultation, IMF Country Report No. 09/159
- Poddar, Tushar, Sab, Randa and Khachatryan, Hasmik (2006). The Monetary Transmission Mechanism in Jordan, IMF Working Paper No. 06/48

### Legal and Institutional Documents
- Public Debt Management Law No. (26) of 2001, Jordanian Ministry of Finance

*Source: _wp09191 - References*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2009/_wp09191.pdf_