An Empirical Analysis of the Effect of Financial Sector Development on Economic Growth in Emerging Economies

This research investigates the relationship between the development of the banking sector and the economic growth in one of emerging countries, namely Jordan for the period 1970 to 2021.We examine the impact of three primary financial indicators-private sector credit to GDP, bank deposit liabilities to GDP, and money supply to GDP-on economic performance.The empirical application of cointegration analysis and Vector Error Correction Models (VECM) reveals substantial long-term correlations between the financial development indicators and economic growth.The empirical results indicate that there is a strong and significant relationship between private sector credit, bank deposits and the long-term economic growth in Jordan.Granger causality studies indicate that there is a two-way relationship between bank deposits, financial deepening, and economic growth.On the other hand, analysis of private sector lending reveals a one-way causal flow towards economic growth.However, the short-run analysis provides a more intricate depiction, as certain models suggest that the immediate impacts of financial development on growth are either negative or insignificant.The time disparity observed underscores the intricate relationship between finance and economic growth.Furthermore, we observe that trade liberalization consistently is associated with a favorable effect on economic development in all models.The findings have significant ramifications for policymakers in Jordan and other developing economies, offering valuable direction for formulating focused policies to strengthen the banking sector's role in promoting sustainable economic growth.Our work adds to the wider discussion on the function of financial intermediation in promoting economic growth in emerging countries