Sustainability of Fiscal and Monetary Policies under Fixed Exchange Rate Regime in Jordan

Abstract

This study aims to analyze the sustainability of fiscal and monetary policies and the relationship between them under a fixed exchange regime that is characterized by high budget deficit and public debt in the past four decades. This study is critical for countries adopting a fixed exchange regime to achieve national priorities. Annual data from 1980 to 2020 were employed using Markov Switching Modelling to assess the sustainability of fiscal and monetary policies by identifying the main dimensions of fiscal and monetary policy that affect their sustainability. The findings show that fiscal policy is dominated by unsustainability, as the number of years of unsustainability was estimated to be more than four times the number of years in which it witnessed sustainability. Regarding monetary policy, sustainability was dominant, as it was found that the number of years of sustainability is about 1.3 times the number of years of unsustainability. Under a fixed exchange rate, there is no evidence confirming that there is sufficient coordination between fiscal and monetary policies. The study suggests that policymakers should follow complementary and balanced fiscal and monetary policies to achieve sustained economic growth.