Financial Development and Economic Growth of Jordan

Abstract

The study examines the relationship between financial development variables and economic growth of Jordan. The study used quarterly data for the period 1993:Q₁ to 2014:Q₂ and used unit root test, Cointegration test, VAR, VECM, impulse response function and variance decomposition function to examine the study hypotheses. In addition, Granger causality test is used to determine the direction of the relationship between variables. The study found that narrow money supply (M1), broad money supply (M2) and credit facilities to private sector (CPS) have a positive and significant impact on economic growth of Jordan. The Cointegration test as well as the VECM showed that the financial development variables have a long run relationship with economic growth. In addition, the Granger causality test and VECM estimation indicated that there is a bidirectional causality running from financial development variables to economic growth and from economic growth to financial development variables.

Keywords: financial development, economic growth, VAR, VECM, Jordan.