Impact of Monetary Policy on Financial Stability Evidence from Jordan = أثر السياسة النقدية في الاستقرار المالي في الأردن

Abstract

In this paper, we analyze the relationship between financial stability and monetary policy in Jordan. We consider an impulse function using a VAR framework. A Granger causality test employed to explore the impact of monetary policy shocks on a financial stability index. Findings emphasize that changes in the excess reserves impact positively on the financial stability index, however, the effect is small in magnitude. On the same direction, changes in domestic credit have a significant impact on the financial stability index. These findings support the explanation that monetary policy has a significant effect on the financial stability through affecting its medium target, using its instruments, mainly excess reserves.

Monetary Policy and Banking Sector Stability in Nigeria

“…In real term, a 1% increase in cash reserve ratio brought about a 0.76% increase in banking stability index. This result supported the finding obtained by Khataybeh and Al-Tarawneh (2016), who found that changes in excess reserves had positive effect on financial stability. Lastly, exchange rate has a positive and significant effect on banking stability in Nigeria at the 5% level of significance.…”

“…Result showed a positive relationship between monetary policy and financial stability in Brazil. Khataybeh and Al-Tarawneh (2016) empirically estimated the association between monetary policy and financial stability in Jordan, using monthly data from September, 1993 to December, 2012 and employing the vector autoregressive (VAR) technique. Results showed that changes in excess reserves and changes in domestic credit have positive effect on financial stability.…”

The Measure of Financial Stability and its Impact on Foreign Direct Investment: Evidence from BRIC Nations

“…Further, financial instability was found to impact economic growth significant negatively. (Al-Tarawneh & Khataybeh, 2016) also examined the association between monetary policy and financial stability in Jordan. They employed impulse response function (IRF) using a VAR framework to test the relationship besides employing Granger Causality test.…”