Oil Price Volatility and its Effects on Macroeconomic Stability in Jordan: A Structural VAR Approach

This study examines the dynamic effects of global oil price fluctuations on key macroeconomic indicators in Jordan, including inflation, real GDP growth, fiscal deficit, and exchange rate stability, over the period 2000-2023. As an energy-importing economy, Jordan remains vulnerable to external oil price shocks, which influence domestic price levels, fiscal performance, and growth dynamics. Using quarterly data and a Structural Vector Auto Regression (SVAR) framework, the analysis identifies and quantifies the transmission of oil price shocks through impulse response functions and forecast error variance decomposition (FEVD). The Augmented Dickey-Fuller (ADF) test was applied to ensure stationarity, and optimal lag length was selected based on Akaike and Schwarz criteria. Results reveal that oil price shocks significantly increase inflation and widen the fiscal deficit, with inflation reacting immediately and fiscal imbalances persisting over several quarters. GDP growth shows a delayed negative response, while exchange rate effects are minor due to the fixed peg regime. FEVD results indicate that oil shocks explain up to 18% of inflation variance and around 9% of fiscal deficit variance. The findings suggest that oil price shocks are a key driver of macroeconomic volatility in Jordan. The study highlights the need for fiscal reform, energy diversification, and improved macroeconomic forecasting tools to mitigate the adverse effects of external energy shocks.