Financial Deepening and Economic Growth: The Case of Jordan

Abstract

This study investigates the dynamic relationship between financial deepening and economic growth in Jordan over the period (1992-2014). Vector auto regressive regressions, Granger causality and Johansen-Juselius conitegration tests are employed to achieve the objectives of the study. Using quarterly data, the results indicate no statistically significant effect of financial deepening on economic growth on the short run. However, the cointegration tests show a statistically significant long run equilibrium relationship between the two variables regardless of the proxy used for financial deepening. Moreover, the Granger causality test show a bi-directional causality between economic growth and financial deepening when the latter is measured by the amount of credit granted to private sector. However, a one way causal relationship from the economic growth to financial deepening is found when the amount of deposits and money supply (M2) are used as proxies of financial deepening. These findings have important implications to academicians and policy makers in Jordan.