Inflation, Financial Deepening, and Investment Performance in Jordan: Evidence from the ARDL Approach

Abstract

While inflationary pressures, weaknesses in the financial system, and macroeconomic instability both affect the performance of investments in developing economies, only little empirical evidence on their combined effects was available for Jordan. The present study aimed to explore the correlation between different variables; inflation, financial deepening, and investment performance in Jordan in the short and long run period between 2000 and 2024. The analysis uses the ARDL (Autoregressive Distributed Lag) bounds testing method using time-series data from WDI for an annual rate and introduces interest rates, rate of GDP growth and foreign direct investment as control variables. The results showed strong long-run relationships; that is, inflation was found to have a negative relationship with gross capital formation whereas financial deepening was found to have a positive relationship with investment performance. While growth in GDP had a positive effect on investment in the short-term, interest rates and FDI had the opposite effects. The stability tests indicated the stability of the parameters while the diagnostic tests also verified the robustness of the models since the serial correlation, heteroskedasticity and specification errors were not present. The findings suggest that Jordan's policy makers need to pay more attention to stabilizing inflation and deepening the financial sector, as well as keeping interest rates competitive to boost productive investments. The novelty of the study is the ARDL model that is used in the study to analyze the effects of inflation and financial deepening on investment performance in Jordan in a comprehensive manner and to provide new empirical findings on developing economies in the same macroeconomic context.