The impact of economic growth on credit market development in Jordan

Abstract EN

This study investigated the impact of economic growth on credit market development in Jordan for the period 2000 - 2009, using a Vector Error Correction Model (VECM).

This study aimed to investigate the short - run and the long - run relationship among bank lending, gross domestic product and inflation rate applying the Johansen cointegration analysis.

For this purpose unit root tests were carried out according to Dicky - Fuller (1979)1, and Johansen cointegration analysis was applied to examine whether the variables are cointegrated of the same order2, taking into account the maximum eigenvalues and trace statistics tests.

Finally, a vector error correction model was selected to investigate the long - run relationship between growth and credit market development.

The results suggested that a short - run increase of economic growth per 1 % induced an increase of bank lending 0.4% in Jordan, while an increase of inflation rate per 1% induced a relative decrease of bank lending per 0.56% in Jordan.

The estimated coefficient of error correction term was statistically significant and had a negative sign, which confirmed that there was not any problem in the long - run equilibrium between the examined variables.

The empirical results indicated that economic growth had a positive effect.

Bank development was determined by the size of bank lending directed to private sector at times of low inflation rates leading to higher economic growth rates.