Towards Adopting Inflation Targeting: The Credibility and Limitations of Monetary Policy Under The Fixed Exchange System: The Case of Jordan

Abstract

In this paper the interest rate pass through is examined within its intermediate lag of action to shed light on the credibility of monetary policy in Jordan, where the reputation of low inflation is imported through a fixed exchange rate system to the U.S dollar. We use time series methods which allow us to test for asymmetric adjustment. The results are compared to that of two inflation targeting countries at time proceeding building the credibility of price stability domestically: New Zealand and the UK. The empirical findings suggest that the interest rate pass-through in Jordan is weak and slow. In addition, our results indicate the existence of non-competitive pricing behaviour in the market. Comparing the results to the two inflation targeters, the study suggests that Jordan needs to move to a more resilient exchange rate arrangement.