Empirical Findings

Unit Root Test:

The results of the unit root tests ADF, PP and KPSS are presented in Table (1).

Table 1
Statistics (Level) LNGDP lag LNBC lag LNBD Lag LNIR Lag

T (ADF) -2.918 (2) -3.139 (1) -2.935 (1) -4.655* (0)

 (ADF) -0.643 (2) -0.666 (1) -1.142 (0) -4.617 (0)
 (ADF) 8.887 (0) 2.116 (1) 6.549 (0) -0.281 (1)
T (PP) -1.684 (3) -1.991 (2) -2.592 (3) -4.708* (2)
 (PP) 0.014 (3) -0.324 (2) -1.247 (4) -4.681* (2)
 (PP) 6.853 (3) 5.481 (2) 6.487 (1) -0.293 (1)
T (KPSS) 0.117 (4) 0.079 (3) 0.075 (2) 0.097 (3)
 (KPSS) 0.664** (4) 0.663** (4) 0.678** (4) 0.158 (3)

Statistics LNGDP lag LNBC lag LNBD Lag LNBD Lag

(First Difference)

T (ADF) -1.547 (1) -2.616 (0) -5.042* (0) -10.317* (0)

 (ADF) -1.642 (1) -2.665*** (0) -5.007* (0) -10.538* (0)
 (ADF) -0.857 (1) -1.297 (0) -2.448** (0) -10.748* (0)
T (PP) -4.316** (3) -2.616 (0) -5.055* (3) -12.482* (5)
 (PP) -4.426* (3) -2.665*** (0) -5.008* (2) -12.785* (5)
 (PP) -1.399 (3) -1.324 (1) -2.281** (3) -13.041* (5)
T (KPSS) 0.082 (3) 0.065 (2) 0.090 (4) 0.062 (1)
 (KPSS) 0.097 (3) 0.065 (2) 0.137 (2) 0.061 (1)

Hypothesis testing for ADF and PP:

H0 = there is unit root.
H1 = there is no unit root.
Hypothesis testing for KPSS:
H0 = the series are stationary.
H1 = the series are non-stationary.
According to unit root tests results they are indicating that only LNIR was stationary at (level),
it is I (0) stationary. After transferring all the series to their first differences some of them
became stationary, they are I (1) stationary. In this study, we will assume that all the variables
are stationary at their first difference I (1) stationary.
Vector Autoregression (VAR) model:
The lag selection criteria used to select the optimum lag because it is necessary to avoid over
parameterizing model, (Al-Eitan 2012, al-qudah, 2014). The results of the analysis are shown
in Table (2).
 Table (2)

Lag LogL LR FPE AIC SC HQ

0 102.28 NA 4.56e-09 -7.856 -7.856 -7.752

1 132.08 44.71 1.50e-09 -9.007 -7.829* -8.694

2 152.63 23.97 1.22e-09* -9.386 -7.423 -8.865

3 172.21 16.31 1.43e-09 -9.684* -6.935 -8.955*

Based on the results of the likelihood ratio test above, we can consider (FPE) value to define it
which indicates that there are two optimal lags should be included in the system, which gives
us stable model with no Autocorrelation and no Heteroscedasticity problems.

Testing for Cointegration:

Johansen Cointegration is the main test for finding long run relationship between variables,
trace statistics was used to show the relationship of all the variables in the model. The results
of the Pantula table are shown in Table (3).

Table (3)

Model2 Model3 Model4

NONE 75.34752** 69.84584** 86.90975**
At most 1 30.45624 25.87741 41.79814
At most 2 11.61831 7.041409 22.67922
At most 3 3.297750 0.821231 4.468640

Based on the Pantula table we choose model two which shows there is at least 1 cointegration,

the main idea behind the test is to check if the variables converge or not.

Vector Error Correction Model (VECM) Results:

The VEC model describes how the inspected model is adjusted each time it goes to long-term
equilibrium (Engle and Granger, 1987).

The results of long and short term equilibrium are shown in Table (4,5).
 Table (4)

Variable Coefficient Std. Error t-Statistic

LNBC(-1) -0.452 0.368 -1.227

LNBD(-1) -0.460 0.380 -1.211
LNIR(-1) 0.782 0.111 7.021
C 4.413 0.975 4.523

Table (5)

Error Correction Coefficient Std. Error t-Statistic

CointEq1 -0.065 0.035 -1.836

D(LNGDP(-1)) -0.257 0.277 -0.925
D(LNBC(-1)) 0.456 0.148 3.075
D(LNBD(-1)) 0.321 0.111 2.888
D(LNIR(-1)) 0.0358 0.014 2.533

Based on our results in Table (5) above, the coefficient of the Cointegration equation
(CointEq1) which is named the speed of adjustment toward equilibrium indicates that the
variables are convergence with speed of 0.065 each year.

According to the ECM output represented in table (4), we can Interpret the cofficients of Long
Run Equilibrium as; if LNBC increases by 1%, LNGDP will increase by 0.452 holding other
factors constants. 1% increment in LNBD will cause LNGDP to increase by 0.460 keeping
other factors constants. Lastly, if LNIR inclines by 1% GDP growth will decline by -0.782
considering other factors constants.
Concurring to the ECM output result in Table (5), we can Interpret the cofficients of short Run
Equilibrium as; if LNBC increases by 1%, LNGDP will increase by in 0.456 holding other
factors constants. 1% increment in LNBD will cause LNGDP to increase by 0.321 keeping
other factors constants. Lastly, if LNIR inclines by 1% GDP growth will increase by 0.035
while other factors constants.
Granger Causality Test
To examine the causal relationship between banking sector indicators and GDP in Jordan or
vice versa we have used Granger Causality Test. This causal relationship can be bidirectional
or unidirectional across variable. The results of Granger causality test are reported in table (6).
Table (6)
Variables Chi-sq Df P-values

LNBC ⇒ LNGDP 5.92 2 0.051***

LNIR ⇒ LNGDP 3.08 2 0.028**

LNBD ⇒ LNBC 7.16 2 0.0278**

The null hypothesis:

H0: X variable does not Granger Cause Y variable.

H1: X variable Granger cause and Y variable.

We can see that LNBC and LNBD Granger causes economic growth (GDP) since the P-values
are less than even at 10% so we can reject H0 and accept H1. The LNBD Granger cause
economic growth LNBC, since P value is less than even at 5% so we can reject H0 and accept
H1. We conclude that there is a unidirectional causality running from banking sector indicators
(banks deposits, banks credits) to GDP.