The Money Demand Function for Jordan: An Empirical Investigation
Dr. AL-Abdulrazag Bashier, Dr. Abdullah Dahlan

Abstract
A Considerable volume of research has tried to estimate the demand for money function for different countries as well as in Jordan. This research is an attempt to examine the money demand function and its stability in Jordan over the period 1975-2009. Although previous studies have been conducted on the demand for money in Jordan, the results have been mixed due to different methodology and data time span. A common theme of almost all studies in Jordan until a short period is the application of the traditional estimation techniques. The reliability of the estimation results were questioned due to the shortcomings of traditional techniques. A modern estimation technique was introduced, like Cointegration technique. However, findings of Cointegration have been interpreted as a sign of constancy of parameter estimates. The present paper employs CUSUM and CUSUMSQ tests in conjunction with Johansen-Juselius (1990) Cointegration analysis of a multivariate system of equations to test for the existence of a long run relationship between the determinants. The study employs the Augmented Dickey-Fuller (ADF) unit root tests proposed by Dickey- Fuller (1981) to determine the order of integration of the series. Moreover, the study applies the impulse response functions (IRFs) and variance decomposition (VDC) to investigate the effect of the determinant factors on money demand. The statistical tests revealed that all time series data are integrated of order one I(1). The Johansen-Juselius Cointegration test shows that the determinant factors are cointegrated. The empirical findings stress the existence of a positive relationship between money aggregates and the level of income while the relationship is negative for interest rate and exchange rate depreciation. The results of stability tests reveal that M2 money demand in Jordan is stable.

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