Financial Development, Public Debt, and Economic Growth Nexus in Jordan

The objective of this study is to critically review the relationship between financial development, public debt and economic growth in Jordan, which has experienced structural fragility, fiscal stress and asymmetric relationships between financial expansion and economic growth, despite the high level of public debt. The aim is to simultaneously test for linear and nonlinear effects, taking into account the debt-overhang and financial intermediation perspectives. The results from the annual time-series data (1980–2024) using the ARDL bounds testing approach are consistent with cointegration where the error correction term is highly significant suggesting that the variables move quickly towards long run equilibrium. In the long run, inflation negatively impacts growth, while financial development, public debt, foreign direct investment, gross capital formation, and trade openness positively impact growth. Short-run estimates indicate that debt is positively associated with growth, whereas financial development has a negative short run coefficient, suggesting that time matters asymmetrically and there may be crowding-in effects over time. Diagnostic tests show no serial correlation, heteroskedasticity or misspecification exists, whereas stability tests show the parameters are constant. The novelty of the originality is that the proposed model of asymmetric debt-finance-growth relationship goes beyond the linear or single-factor models, as it is one of the first studies specifically on the Jordanian context to model such relationships within a single nonlinear ARDL framework. Implications call on policy makers to concentrate on supply of credit in productive activities, control inflation and maintain moderate debt level to prevent fiscal dominance.