Determinants of Real Interest Rates: The Case of Jordan Long-Fei

Abstract

The study is aimed at investigating the main factors that affect the interest rate yields, in the long-term. In addition, the study surveys the theories and literature relating to the determinants of interest rate. The importance of which is essential not only for governments, but also for banks and corporate financial risk management decisions, including risk exposures in banks and capital markets. Interest rate influences corporate profit as well as growth. For this purpose, the study examines the impact of budget deficit, risk-free rate, capital inflows, money supply and business cycles on real interest rate in Jordan. These factors are based upon well-established theories and straightforward practical view as interest rate determinants. Using data for , the study employed Johansen's co-integrating test, which takes into consideration the long-term unsynchronized relationships. The data is tested for normality, symmetric correlations, covariance diagonal and unit root. The results show that the government budget deficit, short-term risk-free interest rate, capital inflows, money supply and business cycle are long-term determinants of the real interest rate in Jordan. The coefficients of government budget deficit, short-term risk-free rate, money supply and business cycle all are inversely affecting the real interest rate, while capital inflows has a positive impact on the real interest rate.

Do Real Interest Rate, Gross Domestic Savings and Net Exports Matter in Economic Growth? Evidence from Indonesia

“…From the previous analysis, it can be known that shocks of real interest rate have a positive response on the economic growth and began to stabilize in the period from the 23rd until the end of the observation period. The findings support studies by Ajlouni (2018); Hsing (2017) showing that, in relation to the relationship between real interest rate and economic growth, the case in Indonesia is the same as Jordan and Australia in a certain time period. However, these results are not consistent with the hypothesis formulated and did not support findings by Masih and AbdulKarim (2014), which revealed that the exchange rate negatively affects economic growth.…”

“…From the VECM analysis, it suggests that output, interest rate, and prices are the leading variables, while exchange rate and money appear to have borne the brunt of the short-run adjustments. Indeed, Ajlouni (2018) stated that the real interest rate (RIR) plays a crucial role in maintaining inflation and price stability so that the stability of Jordan's economic growth can be realized. Whereas in Australia, Hsing (2017) showed that in the short term the real interest rate (RIR) boosts GDP which lead to economic growth.…”

Managing the Nigerian Economy through Fiscal Deficit

“…Likewise, Ajlouni (2018) examined how the fiscal deficit affected the Jordanian economy. The study investigated the relationship between budget deficits before and after grants and economic growth.…”