An Estimated Dynamic Stochastic General Equilibrium Model of the Jordanian Economy

This paper presents and estimates a small open economy dynamic stochastic general-equilibrium model (DSGE) for the Jordanian economy. The model features nominal and real rigidities, imperfect competition and habit formation in the consumer’s utility function. Oil imports are explicitly modeled in the consumption basket and domestic production. Bayesian estimation methods are employed on quarterly Jordanian data. The model’s properties are described by impulse response analysis of identified structural shocks pertinent to the economy. These properties assess the effectiveness of the pegged exchange rate regime in minimizing inflation and output trade-offs. The estimates of the structural parameters fall within plausible ranges, and simulation results suggest that while the peg amplifies output, consumption and (price and wage) inflation volatility, it offers a relatively low risk premium.Jordan;Income;Exchange rate depreciation;Exchange rate appreciation;Economic models;External shocks;Oil prices;Price adjustments;Wage policy;inflation, exchange rate, monetary policy, real exchange rate, real wages, exchange rate regime, price inflation, nominal interest rate, monetary economics, nominal exchange rate, wage inflation, flexible exchange rate, aggregate demand, exchange rate volatility, flexible exchange rate regime, inflation targeting, exchange rate policy, price elasticity, fixed exchange rate, real interest rate, foreign currency, price level, floating exchange rate regime, real exchange rate appreciation, floating exchange rate, relative price, real exchange rate volatility, relative prices, fixed exchange rate regimes, exchange rate movement, exchange rate movements, exchange rate regimes, inflation target, inflation stabilization, inflation rate, terms of trade, real effective exchange rate, real exchange rate misalignment, annual inflation rate, terms of trade shocks, macroeconomic analysis, exchange rate deviations, effective exchange rate, real exchange rate misalignments, real variables, annual inflation, exchange rate devaluation, real interest rates, exchange rate policies, fixed exchange rate regime, exchange rate misalignments, exchange rate misalignment, rise in inflation