Jordan revamps forecast model with richer interactions

The Central Bank of Jordan has updated its key medium-term forecast model, adding a new fiscal block and more detailed open economy analysis.

The update to the Jordan Analysis Model (Jam) was carried out with technical assistance from the International Monetary Fund. A new IMF working paper sets out the main changes.

Jam2.0 is a quarterly projection model with a semi-structural framework. It reflects elements of new Keynesian theory, such as monopolistic competition, nominal rigidities and monetary policy that is non-neutral in the short term. But in contrast to dynamic stochastic general equilibrium models, the coefficients in Jam2.0 are reduced form rather than “deep parameters”, making them more flexible.

One key change since the first version of Jam is the addition of the fiscal block. This allows the central bank to track how the fiscal balance impacts the real economy, highlighting fiscal-monetary interactions and trade-offs.

Jam2.0 also includes “enriched open economy analysis”. The model features an endogenous interaction between capital flows and risk premia, and reflects the effects of interventions by the central bank, which operates an exchange rate peg.

A third key update breaks down GDP on the basis of expenditure, separating out domestic and foreign demand, giving the central bank a clearer picture of growth drivers and policy effects.

“Overall, Jam has proven to be an invaluable quantitative tool for analysing the effects on the Jordanian economy of domestic and global supply shocks, global food and fuel price shocks, and global financial shocks,” the IMF paper says.