Evaluating the Effectiveness of Macroeconomic Indicators to Influence the Stability of Jordanian Banking System

This research is primarily aimed at investigating the long as well as short-run causalities, which are running from the movements of macroeconomic indicators towards the stability of Jordanian banking system, as captured by debt ratio and the Z-score index. Thus, through analyzing a time series data covering the period from Q1/2001 to Q4/2017, the results show that only after including the second difference, the series of variables became stationary. Thereafter, findings from Johansen co-integration test as well as the single equation of the error correction model confirm that the stability of banks is found to be significantly related to the quarterly change in macroeconomic indicators, over the long-run. However, results from Wald test proved that except for inflation, the z-score index is found not to be related to the volatility in macroeconomic indicators during the short-run. By contrast, the results show a short-run causality that is running from inflation as well as income per capita towards debt ratio. Moreover, the study concludes that indicators such as inflation, income per capita, and the rate of interest are conducting a vital role to influence the stability of Jordanian commercial banks, during both the short and long terms.