Estimating the causal relationship between external debt and inflation in Jordan: evidence from an ARDL and Toda–Yamamoto approaches
Journal of Financial Economic Policy
ISSN: 1757-6385
Article publication date: 2 July 2024
Issue publication date: 2 January 2025
Abstract
Purpose
This study aims to investigate the causal relationship between external debt and inflation in Jordan over the period 1970 to 2020.
Design/methodology/approach
The external debt–inflation nexus is examined within a multivariate framework by including other determinants of inflation, including money supply and the nominal effective exchange rate. This study uses an ARDL bounds testing approach to cointegration to test the existence of a long-run relationship between the inflation rate and its drivers. An error correction model is estimated to reveal the short-run dynamics of the series. The direction of causality among the variables is examined using a modified version of the Granger non-causality test due to Toda and Yamamoto (1995). The analyses control for the presence of structural breaks in the underlying time series.
Findings
The empirical results show that external debt and money supply have a statistically significant positive effect on inflation in the long run. The authors also find that a nominal depreciation of the Jordanian Dinar raises inflation rates in the long run. The Toda–Yamamoto Granger non-causality test findings reveal a statistically significant bi-directional positive causality between inflation and external debt, between the nominal effective exchange rate and inflation and between money supply and inflation.
Practical implications
Proper management of the exchange rate policy, money supply and external debt levels is crucial to control inflation rates in Jordan.
Originality/value
To date, the authors are unaware of any empirical study that examines the impact of external debt on inflation in Jordan, and the current study aims to fill this gap in the literature.
Keywords
Acknowledgements
The authors would like to thank the anonymous referees and the Editor for their constructive comments and suggestions that considerably improved the paper.
Funding: This work was supported and funded by the Deanship of Scientific Research at Imam Mohammad Ibn Saud Islamic University (IMSIU) (grant number IMSIURP23016).
Citation
Sharaf, M.F., Shahen, A.M. and Binzaid, B.A. (2025), "Estimating the causal relationship between external debt and inflation in Jordan: evidence from an ARDL and Toda–Yamamoto approaches", Journal of Financial Economic Policy, Vol. 17 No. 1, pp. 77-91. https://doi.org/10.1108/JFEP-06-2023-0148
Publisher
:Emerald Publishing Limited
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