Abstract:

Purpose- Economists have given special attention to understanding the transmission mechanisms through which monetary policy affects the real economy. Indeed, understanding these mechanisms has resulted in the publication of numerous theoretical and empirical papers. This paper examines the effectiveness of the lending channel of monetary policy in Jordan. Methodology- To investigate the monetary policy transmission mechanism in Jordan through its lending channel, this paper uses the time period 1992-2019 and time series techniques including stationarity test, lag length selection criteria, co-integration, Vector Error Correction Model (VECM), and some stability tests. Findings- The results show that monetary policy is not effective in its lending channel. Changes in interest rates do not cause a reciprocal and opposite changes in total bank credit to the private sector. However, the results also reveal that that there is a stable (negative) long run relationship between bank credit to individuals and to the construction sector and monetary policy. These findings, however, are somewhat encouraging given the fact that credit to individuals and to the construction sector account for about 55 percent of total credit to the private sector. Conclusion- To increase the effectiveness of the transmission mechanism of monetary policy in Jordan, relevant stakeholders would be welladvised to consider the establishment of a government (and corporate) securities market. Indeed, the absence if such a market weakens the transmission of changes in the short term policy rate to other points on the yield curve.

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