RELATIONSHIP AND CAUSALITY BETWEEN INTEREST RATE AND INFLATION RATE CASE OF JORDAN

ABSTRACT This study attempts to examine and study the possible of existing relationship between Interest rate and Inflation within Jordan economy over the period of time (1990-2012), firstly by testing the impact of inflation, economy growth, money supply and budget deficit on the interest rate in order to determine the relationship between interest rate and inflation, secondly by investigating the causal relationship between these two variables, using multiple regression, correlation, unit root tests, co-integration tests and causality tests, as well as the trends, graphs and charts of the variables to analyze the variables under study.The empirical results of this study show that there is a positive relationship between inflation and interest rate also there is a bidirectional causality relationship between inflation and interest rate in Jordanian economy over the period of time (1990-2012). Thus the policy makers should pay attention to this kind of relationship between these two such important economic variables.