Towards Adopting Inflation Targeting in Emerging Markets: The (A)symmetric Transmission Mechanism in Jordan

This paper is carried out to investigate adopting inflation targeting in Jordan. The interest rate pass-through channel is assessed to underline the possibility and challenges to target inflation when a country imports the credibility of low inflation from abroad. The interest rate pass through is examined within its intermediate lag of action to shed light on the effectiveness of monetary policy. The Johansen approach is performed to estimate the long-run degree of pass-through along with the speed of adjustment to disequilibrium. The dynamic model of Hendry and Doornik (1994) is employed to connect the short-run and long-run, and to estimate the mean lag of adjustment under (a)symmetric market response. The empirical findings suggest that the interest rate pass-through in Jordan is weak and slow and the symmetric mean lags in the loan and deposit market are highly sticky. In addition, an asymmetric adjustment is found in the loan market, where banks are faster to decrease their interest rates following a change in official interest rates, the behaviour which can be explained by the collusive pricing hypothesis. Comparing the results to the two inflation targeters: New Zealand and the UK, the study suggests that Jordan has to move to a more resilient exchange rate arrangement before committing to the lite-form of inflation targeting.