Do Financial Market Lead to Economic Growth? A Causality Test in Jordan

Abstract

This study investigates empirically into the acclaimed positive role played financial market leading growth, with evidence from the Jordan financial market. Utilising, several econometric techniques models, such as unit root test, co-integration test and formal tests of causality developed by C.J. Granger and yearly Jordan data for the period 1980-2012. Results show that both Engle-Granger and Johansen co-integration test support the view that there is a short-run and long- run relationship between financial market development and economic growth in Jordan. On the other hand, there was no evidence to support the view that financial market in Jordan is a leading sector in the process of the country's economic development. In particular, the causality relationship between financial market development and economic growth in Jordan is bi-directional. Higher development in the financial market causes higher real economic growth. High economic growth in turn promotes development in the financial market. This study's results will be useful in reaching policy decisions to develop financial markets to increase economic growth in developing countries or/ emerging economies, in general, and within Jordan, in particular. Furthermore, providing empirical evidence regarding this critical issue within specific emerging economies will add to the literature on financial market related to the role of financial market development and its influence on economic growth and, thus, initiate an exciting topic for research.