An Empirical Analysis of Output, Interest and Money: The Case of Jordan

This paper investigates the dynamic interactions among money, interest rates, and output (GDP). The Generalized Impulse Response Functions and the Generalized Forecast Error Variance Decomposition are computed in order to investigate interrelationships within the system. The results reveal that a shock to the interest rate has a negative impact on money (M2). The negative impact on M2 is inconsistent with the view that a rise in the interest rate leads to an increase in deposits or in bank loans, which in turn results in an increase in money supply. The impact of the interest rate on GDP is positive. The positive effect of the interest rate on GDP is in contradiction with a theoretical relationship where interest rates have a negative impact on output.