Estimating the Causal Relationship between External Debt and Inflation in Jordan: Evidence from an ARDL and Toda-Yamamoto Approaches

Mesbah Sharaf (), Abdelhalem Shahen and Badr Binzaid
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Mesbah Sharaf: Faculty of Arts, University of Alberta

No 1641, Working Papers from Economic Research Forum

Abstract: This study investigates the causal relationship, if any exists, between external debt and inflation in Jordan over the period 1970 to 2020 within a multivariate framework by including other determinants of inflation. The study uses an ARDL bounds testing approach to cointegration to test the existence of a long-run relationship between the inflation and its drivers. An error correction model is estimated to reveal the short-run dynamics between the series. The direction of causality is examined using Toda-Yamamoto Granger non-causality test. The results suggest a statistically significant long-term relationship between inflation and its drivers. The TodaYamamoto Granger noncausality test reveals a bi-directional causality between inflation and external debt, between the nominal effective exchange rate and inflation, and between money supply and inflation. Proper management of the exchange rate policy, money supply and external debt levels is crucial to control inflation rates in Jordan.

Pages: 22
Date: 2023-07-20, Revised 2023-07-20
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