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framework for an economic model that includes the determinants of inflation where
current account deficit is one of them. The study finds out that the increase in current
account deficit affects domestic inflation negatively in the long run. This result would be
attributed to the fact that current account deficit absorbs big part of the excess in the
domestic demand, in addition to the long run flexibility of the economy to produce
substitutes for imported goods. However, in the short run, it was found that current
account deficit affects domestic inflation positively. It was found that for this period there
is no enough flexibility for the Jordanian economy to produce enough goods to substitute
imports, which leads to inflation.
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