Trade Liberalization and Real Exchange Rate of the Jordanian Dinar against the U.S. Dollar

Abstract

The main aim of this study is to investigate the impact of trade liberalization on real exchange rate of the Jordanian Dinar (JD) against the U.S. dollar for the period (1992-2013). The model of this study includes variables: trade liberalization (OPEN), terms of trade (TOT), net capital flows (NF), money supply (M2), and the real exchange rate of the Jordanian Dinar against the U.S Dollar (€). To achieve this goal, Vector Autoregression Model (VAR) is used, and two tools for analyzing have been utilized: Variance Decomposition and Impulse Response Function. Variance Decoposition results showed that the terms of trade are the main explanatory variable for the real exchange rate, their explanatory power reached about 30%, followed by the explanatory power of the trade liberalization which reached about 25%. Also the results of Impulse Response Function showed that unexpected shocks in trade liberalization negatively affect real exchange rate