Determinants of interest rates in the Jordanian economy: An analytical study for the period 1990 - 2002

Interest rates on credit facilities and bank deposits in Jordan have gained increased attention since their liberalization in the early 1990s. This paper tends to study the would-be macroeconomic determinants of interest rates in Jordan, and analyze their effects on those rates in both magnitude and direction. To do so, the study uses time series econometric analysis via Ordinary Least Squares Method (OLS) to measure and analyze the impact of several variables on the domestic rates of interest. Results show, among other things, that banking rates respond adversely to changes in the money supply, and poorly to changes in the rate of interest on Central Banks three months certificates. Fiscally, it was noticed that government expenditure has no significant impact on deposit rates while it has some small impact on credit rates. The results further demonstrate that domestic interest rates are affected by foreign interest and exchange rates. Consequently, it has been recommended that the Jordanian Central Bank and the Ministry of Finance should cooperate to solidify Jordan's capital market by issuing a broader range of securities with several maturities, enhance the market's liquidity to fit the time and liquidity preferences of savers, and increase competitiveness and cost-efficiency in the banking sector with a view to lowering interest rates.