Monetary Expansion and Economic Stability in Jordan: The Moderating Role of Banking Sector Development

Despite periodic monetary expansion and credit market growth in Jordan, the unemployment rate remains high, and questions are raised about how well liquidity injections are working in the stabilization of the Jordanian labour market. The aim of this study is to investigate whether monetary expansion affects the level of unemployment and if so, to find out whether the development of the banking sector dampened this effect in the light of the data for the period (1980-2024) in Jordan. With the help of annual time-series data, the analysis provides for broad money supply, domestic bank credit, interest rates, government spending and inflation, all in a single moderation. However, the findings turn out to be quite significant and are not up to our expectations: monetary expansion has a positive long run association with the amount of unemployment available, which is what we do not expect. The banking development positively affects banking sector development, which in turn is a negative moderator of the relationship between monetary expansion and job creation and indicates that a positive effect on the employment outcome of banking sector development is in part offset by an adverse effect due to monetary expansion. Unemployment is greatly diminished by interest rates and inflation and is highly increased by government expenditures. The findings suggest how ineffective the monetary expansion could have been in Jordan without the efficient intermediation of finance. The novelty of the study is that banking sector development is used explicitly as a moderator in the monetary expansion-unemployment relation, providing new policy implications for Jordan and other developing economies that operate with an intermediate role of banking system between monetary expansions and the unemployment.