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AbstractThis research is an investigation into the effects of macroeconomicshocks on the Jordanian Banking System It uses the Vector ErrorCorrection Mechanism on quarterly data between 1997-2012 Major findingsof this study are as follows shocks of real GDP positively impact thebanking system and there is little effect from other macroeconomicshocks for example shocks related to the Consumer Price Index andTerms of Trade Introduction Macroeconomic factors can affect the performance of banking systems Anumber of empirical and theoretical researches have questioned theeffects of such shocks on the banking industry Lehmann and Manz 2006studied the impacts of such macroeconomic shocks on the banking systemand learned that recessions rising interest rates and reductions instock prices take the banking industry into losses Somoye et al 2009found that there is a long-run equilibrium relationship betweenmicroeconomic stability and bank lending However when Blank and Dovern2009 examined the impacts of real estate price shocks monetary policyand fiscal policy on the banking system their research revealed thatthere is a strong impact of such shocks on the probability of banksResults found by Dovern et al 2008 were similar According to theresearchers losses on loans result when the banking system is exposedto macroeconomic shocks of an adverse natureJordan has experienced numerous political fiscal monetary anddemographic shocks This raises the question of whether these shocksaffected the performance of the banking sector If macroeconomic shockshave impacted the Jordanian banking sector how has economic performancebeen impacted This research will review the cumulative effects ofmacroeconomic shocks on the banking system through an evaluation ofchanges in the banking system and changes that impacted the entireeconomy This study also investigates the effects of macroeconomicshocks on the banking sector using Total Reserves RS as an indicatorfor the banking system and Consumer Price Index CPI Real GrossDomestic Product RGDP and Terms of Trade TOT as indicators for themacroeconomic real sector An econometric method will be employed toexamine the effects This shall be accomplished for the quarterly
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