Sustainability of Fiscal and Monetary Policies under Fixed Exchange Rate Regime in Jordan
Round 1
Reviewer 1 Report
REVIEW OF SUBMISSION TO SUSTAINABILITY –– 2597318 – “SUSTAINABILITY OF FISCAL AND MONETARY POLICY UNDER FIXED EXCHANGE RATE REGIME IN DEVELOPING COUNTRIES”
Summary of the paper
This paper uses data from Jordan, from 1980-2020, to investigate the sustainability of monetary and fiscal policies, in a fixed exchange rate regime.
The methodology entails estimating two sets of Vector Autoregressive Models, via the Markov Switching Technique. The two sets of models relate to monetary and fiscal policies. The dependent variables in the two sets of models capture outputs of these two policies. The output of fiscal policy is budget deficit, scaled by Gross Domestic Product. The independent variables are public debt (scaled by GDP), “de-trended” fiscal policy expenditure, “de-trended” GDP and real interest rates. The discount rate is the dependent variable capturing output of monetary policy. The independent variables are inflation, “de-trended” GDP, “de-trended” fiscal policy expenditure, the budget deficit (scaled by GDP) and the exchange rate (of the Jordanian dinar against the United States dollar).
Data are collected from publicly available government statistics, from Jordan. The final sample comprises 32 annual observations.
Preliminary results of unit root tests indicate that nearly all the variables are stationary, at either levels, first differences or second differences. The results of Bera-Jarque tests present strong evidence that the residuals are normally distributed. Hence, the authors confidently proceed on the basis that the assumptions underlying their methodology are satisfied.
The primary empirical results indicate that monetary and fiscal policies differ with respect to degree of sustainability. The results also suggest that determinants of whether policy effectiveness differ between sustainable and unsustainable regimes differ, between fiscal and monetary policies. The authors conclude that that owing to their different impacts, policy makers should co-ordinate fiscal and monetary policies.
Critical review
Title
The title is misleading. This is a single-country study. “Developing countries” should be replaced with “Jordan”.
Discussion of Jordanian institutional features
This discussion is informative. It should be more thoroughly referenced.
Literature review
This section is cohesive. It should precede the discussion of fiscal and monetary policies in Jordan. The literature review is general. The discussion of fiscal and monetary policies is specific to Jordan.
Hypothesis development
This paper lacks hypotheses. Hence, the authors should acknowledge that the paper is exploratory.
Methodology
The chosen methodology is appropriate for the purpose of the paper.
Some further clarifications are warranted. How is the nominal interest rate proxied? (e.g., is it an interest rate charged by the central bank?) What observable variable proxies the discount rate? How does this differ from the interest rate? In their discussion of the results, the authors explain that the exchange rate is between the Jordanian dinar and the American dollar. This should also be explained in the discussion of the methodology.
Sample selection
It is apparent that the data are annual. However, this should be explicitly stated.
The authors should explain the filters that resulted in their sample size being 32, rather than 41.
Empirical results
The preliminary results, suggesting that the stationarity and normality assumptions are satisfied, are convincing.
I have only one criticism of the primary results. They are slightly overstated. In some places, the authors claim that their evidence supports conclusions about determinants of policy effectiveness, when the coefficients are not significant. This discussion should be deleted. However, the principal conclusions stand.
My main criticism is that the paper should be purged of colloquial language. Examples include “nowadays”, “of course”, “for instance", “as for”, “it is worth mentioning”, “in other words”, “on the other hand” and “the picture is completely different”.
Author Response
Dear Reviewers thank you very much for the valuable comments and for offering your expertise. We accommodate and enrich the study with all the comments that you have raised, which we believe will improve the study as expected. please find below the reply to all the comments that have been incorporated into the study.
Comment 1
The title is misleading. This is a single-country study. “Developing countries” should be replaced with “Jordan”.
Reply
The title has been changed from Developing Countries to Jordan (line 3).
Comment 2
Discussion of Jordanian institutional features
This discussion is informative. It should be more thoroughly referenced.
Reply
More references have been added.
Comment 3
Literature review
This section is cohesive. It should precede the discussion of fiscal and monetary policies in Jordan. The literature review is general. The discussion of fiscal and monetary policies is specific to Jordan.
Reply
The literature review has been moved before the discussion of fiscal and monetary policies in Jordan. We include the available literature review on the topic under discussion.
Comment 4
Hypothesis development
This paper lacks hypotheses. Hence, the authors should acknowledge that the paper is exploratory.
Reply
The explanation that the paper is exploratory has been added (line 241)
Comment 5
Some further clarifications are warranted. How is the nominal interest rate proxied? (e.g., is it an interest rate charged by the central bank?) What observable variable proxies the discount rate? How does this differ from the interest rate? In their discussion of the results, the authors explain that the exchange rate is between the Jordanian dinar and the American dollar. This should also be explained in the discussion of the methodology.
Reply
All variables have been clarified and explained in the methodology part as requested.
Comment 6
Sample selection
It is apparent that the data are annual. However, this should be explicitly stated.
Reply
Annual has been added (line 294)
Comment 7
The authors should explain the filters that resulted in their sample size being 32, rather than 41.
Reply
An explanation of the sample size being 32, rather than 41 was added (line 332).
Comment 8
I have only one criticism of the primary results. They are slightly overstated. In some places, the authors claim that their evidence supports conclusions about determinants of policy effectiveness, when the coefficients are not significant. This discussion should be deleted. However, the principal conclusions stand.
Reply
The discussion about determinants of policy effectiveness was deleted.
Comment 9
Comments on the Quality of English Language
(My main criticism is that the paper should be purged of colloquial language. Examples include “nowadays”, “of course”, “for instance", “as for”, “it is worth mentioning”, “in other words”, “on the other hand” and “the picture is completely different”.
Reply
All colloquial language has been changed in the paper including proofreading.
Reviewer 2 Report
I am pleased to have the opportunity to review this research paper titled: "Sustainability of Fiscal and Monetary Policies Under Fixed 2 Exchange Rate Regime in Developing Countries" -. This study attempted to explore the sustainability of fiscal and monetary policies and the relationship between them under a fixed exchange regime.
Abstract: is a little dry especially when summarizing the methodology and the need for this study. I would suggest elaborating further.
Introduction: The article flows well and puts the reader into the context of the subject. The aim and objective are well explained, however, I fail to understand how this results from gaps in literature and/or the need to carry out this study. This in my opinion needs to be reflected in the introduction.
Also, I fail to understand why there is a need to spend a whole section on the evolution of fiscal and monetary policies between the 1980 and 2020. Why stop at 2020 and not 2022? and why Jordan? why does Jordan not feature in the title and the aim? I am unable to see a coherent flow.
Literature Review: The authors demonstrates an adequate understanding of the relevant literature in the field and cites an appropriate range of current literature sources related to the study itself. The paper clearly express its case, measured against the technical language of the field and the expected Knowledge of the journal's readership. There is a typo in the last word in line 140 - debt.s should be debts.
The methodology: is well explained and enables replication. This study adopted an analytical approach that is based on a quantitative analysis 183 that uses the vector autoregressive (VAR) model with Markov Switching Technique. However, I believe a section in the methodology should be dedicated to how the literature in the previous section was sampled ( was a systematic review carried out using methods such as PRISMA?) and how the variables where chosen - did this relate to literature a theoretical or conceptual framework? A few lines should be dedicated to explain why the Hodrick-Prescott filter and what is the need for this, what can we determine by it? Also a line to explain the stability tests.
The results and conclusions triangulate with the rest of the paper and are somewhat discussed, highlighting some practical implications. However, results need to be discussed in the light of the literature review or previous literature on the subject.
A section discussing the Limitations of the study and how these were addressed is missing.
I believe that this paper needs to be improved further and can be published after addressing the issues highlighted above.
The authors needs to ensure the paper flows better in terms of structure. that is:
· Purpose
· Need for the study
· Methodology
· Findings
· Conclusions and Practical Implications
Limitations
The paper needs minor proof reading to ensure there are no typos or grammatical mistakes. However, I believe that after carrying out the improvements suggested by the reviewers. The authors needs to ensure the paper flows better in terms of structure. that is:
· Purpose
· Need for the study
· Methodology
· Findings
· Conclusions and Practical Implications
Limitations
Author Response
Dear Reviewer thank you very much for the valuable comments and for offering your expertise. We accommodate and enrich the study with all the comments that you have raised, which we believe will improve the study as expected. please find below the reply to all the comments that have been incorporated into the study.
Comment 1
Abstract: is a little dry especially when summarizing the methodology and the need for this study. I would suggest elaborating further.
Reply
The abstract includes further information on the aim and methodology.
Comment 2
Introduction: The article flows well and puts the reader into the context of the subject. The aim and objective are well explained, however, I fail to understand how this results from gaps in literature and/or the need to carry out this study. This in my opinion needs to be reflected in the introduction.
Also, I fail to understand why there is a need to spend a whole section on the evolution of fiscal and monetary policies between the 1980 and 2020. Why stop at 2020 and not 2022? and why Jordan? why does Jordan not feature in the title and the aim? I am unable to see a coherent flow.
Reply
The title has been changed from Developing Countries to Jordan (line 3).
More clarifications have been added in the introduction reflecting the need for this study and how the results fill the gaps in literature.
The section on the evolution of fiscal and monetary policies between 1980 and 2020 has been reduced.
The study stopped in 2020 because the latest available data when the study was conducted was 2020. During the period 1980-2020, Jordan faced many external shocks and different exchange regimes, for this, the study covered this period.
Comment 3
Literature Review: The authors demonstrate an adequate understanding of the relevant literature in the field and cites an appropriate range of current literature sources related to the study itself. The paper clearly expresses its case, measured against the technical language of the field and the expected Knowledge of the journal's readership. There is a typo in the last word in line 140 - debt.s should be debts.
Reply
The typo error in line 140 has been corrected.
Comment 4
The methodology: is well explained and enables replication. This study adopted an analytical approach that is based on a quantitative analysis 183 that uses the vector autoregressive (VAR) model with Markov Switching Technique.
However, I believe a section in the methodology should be dedicated to how the literature in the previous section was sampled (was a systematic review carried out using methods such as PRISMA?) and how the variables where chosen - did this relate to literature a theoretical or conceptual framework? A few lines should be dedicated to explaining why the Hodrick-Prescott filter and what is the need for this, what can we determine by it? Also, a line to explain the stability tests.
Reply
The methodology section includes more explanation and now is linked with the previous section. in addition, the variables were chosen based on the literature.
An explanation of both Hodrick-Prescott filter and stability tests has been added.
Comment 5
The results and conclusions triangulate with the rest of the paper and are somewhat discussed, highlighting some practical implications. However, results need to be discussed in the light of the literature review or previous literature on the subject.
A section discussing the Limitations of the study and how these were addressed is missing.
I believe that this paper needs to be improved further and can be published after addressing the issues highlighted above.
The authors need to ensure the paper flows better in terms of structure. that is:
- Purpose
· Need for the study
· Methodology
· Findings
· Conclusions and Practical Implications
Limitations
Comments on the Quality of English Language
The paper needs minor proof reading to ensure there are no typos or grammatical mistakes. However, I believe that after carrying out the improvements suggested by the reviewers.
Reply
A limitation of the study has been added.
We make sure that the study flows better in terms of structure based on your valuable comments and other reviewers' comments.
Reviewer 3 Report
The research paper aims to analyze the sustainability of fiscal and monetary policies and the relationship between them under a fixed exchange regime. Even though the topic could be relevant in the context of the particular country`s political approach, the authors have not described the problem or the gap in the existing research. I encourage the authors to elaborate on this issue.
Please carefully read your article before re-submission as it contains unfinished sentences (line 73) and some proofreading comments (line 185).
The research paper needs a relatively weak literature analysis. I suggest the authors explain the selection of the articles used for analysis purposes and add the relevant findings based on the study.
Significant improvements should be made in the last part of the research - Conclusion and Policy Implication - the conclusions are rather general, and policy implications should be better communicated. Moreover, I encourage the authors to add scientific discussion and share the limitations regarding the research results.
Having said that, the article needs significant improvements before it can be considered for publication.
Author Response
Dear Reviewer thank you very much for the valuable comments and for offering your expertise. We accommodate and enrich the study with all the comments that you have raised, which we believe will improve the study as expected. please find below the reply to all the comments that have been incorporated into the study.
Comment 1
The research paper aims to analyze the sustainability of fiscal and monetary policies and the relationship between them under a fixed exchange regime. Even though the topic could be relevant in the context of the particular country`s political approach, the authors have not described the problem or the gap in the existing research. I encourage the authors to elaborate on this issue.
Reply
The problem as well as the gap in literature have been added to the study.
Comment 2
Please carefully read your article before re-submission as it contains unfinished sentences (line 73) and some proofreading comments (line 185).)
Reply
The paper has been reviewed and all unfinished sentences have been corrected.
Comment 3
The research paper needs a relatively weak literature analysis. I suggest the authors explain the selection of the articles used for analysis purposes and add the relevant findings based on the study.
Reply
more literature has been added and linked with the findings.
Comment 4
Significant improvements should be made in the last part of the research - Conclusion and Policy Implication - the conclusions are rather general, and policy implications should be better communicated. Moreover, I encourage the authors to add scientific discussion and share the limitations regarding the research results.
Reply
Improvements along the study have been added, the conclusion revised and shortened, and policy implications better communicated.
Round 2
Reviewer 2 Report
I believe the author/s have addressed all the issues and suggestions identified by the reviewers. The paper now demonstrates an adequate understanding of the relevant literature in the field and cites an appropriate range of literature sources related to the study. It clearly expresses its case, measured against the technical language of the field and the expected knowledge of the journal's readership.
The article flows well and puts the reader into the context of the subject. The aim and objective are well explained and result from the gaps in the subject. The methodology is well explained and enables replication, while the results and conclusions triangulate with the rest of the paper and are well discussed, highlighting some practical implications.
I believe this paper can now be published as is and adds value to literature already published in this field.
Reviewer 3 Report
Thanks to the authors for the improvements.
In my opinion, the data limitation should be indicated in the introduction of the work.
In general, I believe that the Manuscript is publishable.
