Understanding the role of Markov chain modeling in assessing the governance monetary transmission mechanisms: A governance outlook

Abstract

This study investigates Jordan’s monetary policy impact through empirical data analysis from January 2006 to December 2022, focusing on the influence of the Central Bank of Jordan’s (CBJ’s) official interest rate on key economic indicators, using the Markov chain approach following Ayo and Uwabor (2021) and Vulpiani (2015). It analyzes transmission mechanisms affecting inflation rate, deposit rate, lending rate, private sector credit, and foreign reserves. Findings reveal significant effects of interest rate changes on these indicators, with notable short-term reactions in deposit rates and more robust medium-term responses to rate decreases. The study recommends utilizing Markov chain techniques for forecasting monetary variables, offering valuable insights into transmission dynamics for informed policy decisions. Understanding the relationships between interest rates and economic indicators can aid the central bank in effectively managing policy and ensuring financial stability.