Is there any financial kuznets curve in Jordan? a structural time series analysis

Abstract

This paper investigates the notion of the financial Kuznets curve in an emerging country—Jordan. Both variants of the financial Kuznets curve (growth financial Kuznets curve and inequality financial Kuznets curve) have been examined using different time series methodologies applying to a sample period from 1993 to 2017. The unobserved components model results provide evidence for both variants of the financial Kuznets curve when using private credit to GDP as a proxy for financial-sector development. Moreover, non-nested model tests suggest that financial intermediaries are relatively more important than stock markets for income inequality. Overall, this paper provides evidence for the financial Kuznets curve in emerging countries. Moreover, it provides new insights for policymakers in Jordan in their challenge to boost economic growth and decelerate income inequality, by reversing the trend towards the concentration of power in the financial sector and creating public-financial institutions that provide affordable credit to small businesses and households.

Keywords:

• Financial kuznets curve
• financial development
• economic growth
• income inequality
• unobserved components model
• non-nested model tests

PUBLIC INTEREST STATEMENT

Financial development’s positive contributions to economic growth and income inequality are well established in the literature. However, recent evidence finds that the relationship may reverse following a turning point, producing a U-shaped curve or Inverted U-shaped curve, which is a depiction of ‘the financial Kuznets curve’. In this sense, most literature investigates the financial Kuznets curve in developed countries, where the financial sector grew excessively to extract rents from the real economy. Therefore, this study investigates the existence of the financial Kuznets curve in Jordan as a case of an emerging country and confirms the existence of the financial Kuznets curve, which suggest that policymakers in Jordan should carefully address the issue of excessive finance and encourage a balanced growth between financial and real sectors to preserve the favourable contribution of the financial sector.

Acknowledgement

We are grateful to the editor and two anonymous referees for useful comments.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Correction

This article has been republished with minor changes. These changes do not impact the academic content of the article.

Notes

1. Mostly, economists use the ratio of credit to private sector to GDP or the ratio of stock market capitalisation to GDP as proxies for financial development or financialisation. Imad Moosa (2016) used the ratio of publicly traded shares to GDP as a proxy for financialisation.

2. Moosa (2018) contends that financialisation is the later stage of financial development, when the financial sector becomes excessively large and starts to exert negative consequences of the real economy. See, for Imad Moosa (2016), Moosa (2018).

3. The “new literature” refers to the new line of finance-growth research triggered by the global financial crisis to investigate the excessive finance hypothesis (Panizza, 2014).

4. Arcand et al. (2015) were first published in 2012 as a working paper.

5. https://leadingedgeguides.com/guide-Jordan-2018-shock-proof-financial-sector/, Accessed September1^st, 2021

6. Central Bank of Jordan (CBJ), Financial Stability Report (2018). https://www.cbj.gov.jo/EchoBusv3.0/SystemAssets/PDFs/EN/JFSR2018E%20-20-10-2019.pdf. Accessed September 1^st, 2021

7. The data series ends in 2017 because of data availability issues related to Gini coefficient.

8. Mendelssohn (2011) provide a review of the STAMP software.

9. Banks is a shortened name for “banks and other financial institutions”

10. Financialisation is an alternative term of financial development that is generally used when referring to the negative effect of the financial sector. However, in some strands of finance literature, financialisation and financial development are used interchangeably.

11. It is worth mentioning that the above estimated turning points have never been crossed-over in Jordan during the sample period except for years 2005 to 2007.

12. When measured relative to GDP, for example, the stock market capitalisation to GDP were hovering just over 60% in 1990s, whereas it plummeted to below 60% by the end of the sample period in 2017. Also, it is worth noting the stock market capitalisation to GDP had reached 230% in 2007.

Additional information

Funding

The authors received no direct funding for this research.

Notes on contributors

Ibrahim N. Khatatbeh

Ibrahim N. Khatatbeh is an assistant professor of finance at the Hashemite University, Jordan. He obtained a PhD in finance from RMIT University, Australia. His main research interests are in multidisciplinary research and His work has been published in several fields including finance, insurance, and public policy.

Wasfi Al Salamat

Wasfi Al Salamat is an associate professor of finance at the Hashemite University, Jordan. He received a PhD in Finance from the University of Wales at Bangor, UK. His research interests are Corporate Finance; Financial Economics; Dividend Policy; Capital Structure; and Financial Analysis.

Mohammed N. Abu-Alfoul

Mohammed N. Abu-Alfoul has a PhD in Economics from Swinburne University of Technology, Australia. His research interests are economic growth, informal economy, and econometrics.

Jamil J. Jaber

Jamil J. Jaber is an academic staff at the University of Jordan-Aqaba branch, Jordan. He has a PhD in actuarial statistics and financial risk management from the National University of Malaysia, Malaysia. His research interests are actuarial statistics, financial risk management, and risk modelling.