Monetary Policy and the Central Bank in Jordan

IMF Working Papers, September 1, 2009

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The Central Bank of Jordan (CBJ) and its operational independence changed over time in line with the evolution of the monetary policy framework and as a result of the currency crisis in the late 1980s.
The paper examines the developments of the CBJ, its independence in conducting monetary policy and the various instruments at its disposal, with special focus on the certificates of deposit (CDs) market, the main monetary policy instrument, and the treasury bill market.
Although Jordan operates an exchange rate peg, which has been fixed to the USD since 1995, there is some room for flexibility in operating monetary policy in the short-run, where the CBJ has some autonomy in determining the spread between domestic and US interest rates.
VAR and VECM results suggest that the response of the policy rate in Jordan to innovations in the US Federal Fund's rate is less than one-for-one.
In the short-run, the CBJ appears to conduct monetary policy in response to domestic inflation and a measure of the domestic output gap.

Certificates of deposit (CDs) market identified as the main monetary policy instrument.
Treasury bill market also examined as part of the CBJ’s toolkit.
Emphasis on the evolution of operational independence as tied to monetary framework changes and past currency crisis dynamics.

Exchange rate regime: conventional peg fixed to the USD since 1995.
Short-run autonomy: CBJ retains some discretion in setting the spread between domestic interest rates and US rates.
Empirical evidence: VAR and VECM analyses indicate less-than-one-for-one transmission of US Federal Fund rate innovations to Jordan’s policy rate.

Short-run policy appears responsive to:
- Domestic inflation.
- A measure of the domestic output gap.