Public Debt Management and Macroeconomics Policies Coordination: Evidence from Jordan

Abstract

This study aimed to analyze the effects of fiscal and monetary policies interactions on public debt in Jordan during (1970 – 2019). Using Vector Error Correction Model (VECM) derived from VAR (Vector Auto regression), and examine dynamic interactions between economic variables over time, by Appling Impulse Response Function, and Variance Decomposition. The results indicated that the fiscal policy instruments affect public debt in two different directions, the expansion of government expenditure positively affect public debt, while tax revenues reduce indebtedness. The monetary policy instruments affect public debt in the same directions, as the results indicated that the central bank in controlling money supply and managing interest rate helps the fiscal authority in reducing the public debt in Jordan. The results confirm the strongest impact of government expenditure on public debt in Jordan. The study recommends the necessity of rationalizing government expenditures and combating tax evasion. In addition, more coordination between fiscal and monetary policies.

The Dynamic Iinterrelationships Between Fiscal and Monetary Policies in Jordan

“…In addition, there are indirect relationships, such as the expectation of a large budget deficit in the future, which leads to an increase in the demand for external borrowing, which leads to the instability of the government's financial position, which leads to the instability of financial markets, thus the collapse of the monetary system. However, the size and the maturity of government debt affect future fiscal and monetary policy decisions (Alzyadat, 2020). Another example of the indirect relationship between fiscal and monetary policies is that the expansionary fiscal policy financed by borrowing means, for economic units, that the government will increase taxes in the future, thus they decide to increase its savings and reduce its consumption, and this is called (Ricardian -Equivalence), this means, the decisions of the economic units and the monetary authority as well, will depend on their awareness of the fiscal policy.…”

Proposed Board of Public Debt Burden Assessment

“…While fiscal policy directly impacts public debt management, monetary policy can play an important supporting role [Moore & Skeete, 2010]. However, public debt management is important because its size and maturity affect future fiscal and monetary policy decisions therefore the coordination between fiscal and monetary policies becomes inevitable [Alzyadat, 2021].…”