Does An Emerging Equity Market Stimulate Long-Term Economic Growth? Evidence from Jordan

After considering the time series characteristics of our dataset, this paper examines the causal relationship between financial development and economic growth in Jordan during 1980-2009. Financial development is proxied by both equity market capitalization and bank credit supplied to the private sector. Equity market liquidity (traded values) is used as a robustness test. After applying Granger causality tests, by using the cointegration and vector error-correction (VEC) framework, our results support a limited bi-directional causality relationship between equity market and economic growth. A bank has dual impact on the equity market and economic growth, though it has greater influence on the equity market, reflecting its vital role in both financial development and economic growth. Overall, these findings suggest the need to improve the efficiency of the financial system, especially the banking system, to channel more financial resources into its most productive areas and to thereby promote long-term economic growth.