GDP and Inflation: New Story from a Developing World Case of Jordan

Abstract

Abstract This research examines the short-run and long-run relationships between inflation and economic growth in Jordan during 1977-2021. A two-variable VAR model with three lags was conducted to systematically capture the dynamics in the two-time series, inflation, and economic growth. The dynamic properties of the VAR (3) were summarized using impulse response functions and variance decompositions. There was no long-run relationship between inflation and economic growth, instead, a potential positive short-run relationship exists. Our findings are aligned with the existing body of literature on the nexus between inflation and economic growth; the results of our study can be utilized formulate macroeconomic policies by promoting economic growth which in return provides a stable economic environment without causing inflationary pressures. It could also be utilized by other countries with similar economic structures. Therefore, it is suggested that the country should maintain a moderate inflation rate for short-run growth. JEL classification numbers: E6, E31, O11. Keywords: Inflation, Economic growth, Jordan, SDGs, Vector Autoregressive Model.