The Impact of Monetary Policy on Foreign Reserves: MABP Approach

Abstract

This paper aims to investigate the short and long-run impacts of monetary policy on Jordanian foreign reserves for the period (1980-2012) in the context of the monetary approach to the balance of payments (MABP) and the reserve-flow equation. In doing so, the autoregressive distributed lag (ARDL) bounds testing approach of cointegration is employed.

The empirical results of the bounds testing approach have revealed the existence of a long-run relationship among foreign reserves, determinants of money demand, and the broad definition of money, M2. Moreover, the long-run parameters of the model came in line with the theoretical propositions of the monetary approach since money supply has a negative and statistically significant impact on foreign reserves, while domestic income and domestic price have positive and statistically significant impacts on foreign reserves. Domestic interest rate has a negative and statistically significant impact on foreign reserves, which is consistent with the MABP approach.