Relationship between Bank Credit and Economic Growth: Evidence from Jordan

Abstract

Despite the growing literatures that examined the relationship between financial developments and growth of any economy, there is scarceness in the empirical studies that examine the influence of bank credit on economic performance or growth at secrotal level of any country. Therefore this study came to examine the relationship between bank credit and economic growth in Jordan at different sectors for the period that span from 1993 to 2014. We employ two different methodologies Vector Error Correction Model (VECM) and Granger Causality Test, The results report for a long run relationship could be inferred between Real GDP, and its Explanatory variables of Total Bank Credit (TBC); Bank Credit for Agriculture sector (CFA); Bank Credit for Industry sector (CFI); Bank Credit for Construction sector (CFC); Bank Credit for Tourism sector(CFT). So we can suggest that TBC, CFA, CFI, CFC, and CFT are in the long term relationship with the development of Jordanian economy.Granger causality test conclude for a causal relationship going from economic growth to bank credit at agriculture and construction sectors in Jordan economy. Also the results report bidirectional causality observed among economic development and bank credit to construction sector that is the most important sectors in this economy. Moreover, our results point out that the efficiency of the bank credit facilities in a major economic sectors has an important role in the Jordanian economic growth, and shows the needs to enhance the role of financial sector for different economic sectors by adopting more appropriate macroeconomic policies.