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Arab Journal of Administration المجلة العربية للإدارة

Abstract

This study aims at investigating the impact of financial development on economic growth in Jordan using annual time series analysis over the period of 1980 -2009.To accomplish its objective, the study uses various econometric techniques such as the Unit Root test to test for the stationary of time series, Co-integration test and Vector Error Correction Model to determine the causality relationship between the variables included in the study in the long-run and short-run. Results of Co-Integration test suggest that there is a long-run relationship exists between financial development and the rate of economic growth, Vector Error Correction Model suggest that there is a short-run and long-run relationship exists between financial development and the rate of economic growth. The causality test suggests that any change in economic growth can explain the changes in financial development, as well as the change in the indicators of financial development can explain the change in economic growth in the short-run and long-run. The study results show that there is a bilateral causal relationship between financial development and economic growth in Jordan, so the economic liberalization, increased foreign investment, and more financial developments in Jordan are expected to play an important role in stimulating economic growth rates. The study recommends the government to encourage foreign investment, facilitate entry of foreign capital, launch economic policies to control the rate of inflation, strengthen the policy of financial liberalization. Based on these findings, the current study recommends the need to elaborate and adopt economic policies required to achieve monetary stability and control inflation, because the high rate of inflation leads to a (Trade-Off) for all the positive results in financial development. It also recommends supporting the policy of financial liberalization for its role in increasing rates of deposits, which helps provide the capital necessary to finance productive investment projects.

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