Testing for Asymmetric Cointegration Relationship between Banking Sector Development and Trade Openness: Evidence from Jordan

Ghazi Al-Assaf


The paper is an attempt to test the long-run asymmetric equilibrium relationships between financial development indicators, especially in banking sector, and trade openness. Using Jordanian data, over the period 1967 to 2011, the study has found evidence of asymmetry in the relationship between financial assets ratio and trade openness. However, there is no evidence of presence of asymmetric pattern in the relationship between trade openness and the credit to private sector ratio, total banks deposits ratio, and the financial depth indicator. We have failed to reject the null hypothesis of no cointegration with threshold at a conventional level of significance among two banking sector development, namely, credit facilitated to the private sector and financial development measured by M2 divided by GDP. From TAR estimation, it can be concluded that financial assets ratio responds asymmetrically to the change in the level of trade liberalisation in Jordan, where the speed of adjustment to the new equilibrium is faster when the residual in the past period is positive than when is negative.


Asymmetric Cointegration, Financial Development, Trade Openness, Jordan.

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