Marwan Alzoubi

This paper analyzes the importance of size and capital for risk-taking incentives of Jordanian banks using panel data of 13 commercial banks for the period 2007–2017. The results reveal that size and capital add to stability, consistent with the economies of scale and scope hypothesis. In developing countries, banks are more conservative and less involved in market-based activities; however, they are interconnected just as in developed countries. The results of the first model and second model reveal that as size increases by 1 percent, risk decreases by 0.11 percent and 0.03 percent, respectively, implying that too-big-to-fail is not present and that moral hazard is not a serious issue. In both models, large size is driven by diversification not by risk-taking incentives. In terms of capital, the results of the first model and second model reveal that as capital increases by 1 percent, risk decreases by 0.48 and 0.12 percent, respectively. The fact that Jordanian banks are overcapitalized indicates that the central bank regulation is not binding. Banks increase their capital adequacy ratios to reduce risk. It is clear that there is economic benefit from increased size. However, the failures of large banks are systemic due to their interconnectedness. Therefore, regulators need to pay special attention to them in accordance with Basel III Accord.

This paper investigates the wealth effects of the consumer price index, interest rate, domestic credit and real economic activity on the Amman Stock Exchange performance. Over the period 1991–2020 using the autoregressive distributed lag (ARDL) bounds test. While the interest rate is a powerful monetary tool to fight inflation and recession, it can be detrimental to investors. The target variables, consumer price index (CPI) and interest rate (IDR), are both highly significant with the correct signs. An increase of 1 percent in CPI and IDR leads to a fall in stock prices by 1.6 percent and 5 percent, respectively. While the central bank is targeting inflation by raising interest rates, its actions reflect negatively on the stock market. The short-run model confirms the causality from the independent variables to the dependent variable. Moreover, the error correction term (ECT) is very high and significant at the 1 percent level amounting to 83.3 percent, which confirms the evidence of the long-run relationship. Monetary objectives are really important, but financial stability is also important.

The paper disentangles gross savings into government and private savings and investigate their impact on gross investment. Our methodology is based on a balanced panel of four MENA countries (Tunisia, Jordan, Egypt and Lebanon) for the period 2000-2017 by employing the Panel Vector Autoregressive Model (PVAR). Our findings show that government savings as a ratio of GDP does not have any impact on investment while private savings as a ratio of GDP does. Both variables exhibit the correct signs. The results also show that mobility of private saving is high and seemingly statistically inconsistent with the Fielstein and Horioka (1980) puzzle. Our paper also reveals that even though OECD countries are more open than our sample countries, the higher capital mobility of our sample is driven by the economic and political instability in the region.

This study examines the effect of deficit financing on economic stability in Jordan during the period 2005-2017, using quarterly data by employing the Vector Error Correction Model (VECM) after seasonally adjusting the variables. This paper is unique as it is the first of its kind that tackles the issue of stability in Jordan. It provides empirical evidence that external borrowing (EBDT) and domestic bank financing (BANK) negatively affect economic stability in Jordan. The bank effect is due to crowding out the private sector. External borrowing negative impact is driven by the current high level of outstanding public debt, 98 percent of GDP. Public debt is mainly channeled to finance current expenditures at the expense of capital expenditures, which has a minimal impact on growth. Interest rate (REPO) effect is in line with the finance theory as higher rates lead to lower growth. Non-bank financing (NonBank), although not statistically significant, exhibits the right sign as it has a positive effect. Future research may extend this work by including other macroeconomic variables such as current account deficit, money supply and direct foreign investment.