Macroeconomic Environment and Financial Sector’s Performance: Econometric Evidence from Three Traditional Approaches

The IUP Journal of Financial Economics, Vol. 8, Nos. 1 & 2, pp. 103-123, March & June 2010

Posted: 19 May 2010

See all articles by Muhammad Qaiser Shahbaz

Muhammad Qaiser Shahbaz

COMSATS Institute of Information Technology (CIIT)

S. M. Aamir Shamim

Dawood Islamic Bank Ltd.

Naveed Aamir

Social Policy and Development Centre

Date Written: May 18, 2010

Abstract

Stable macroeconomic condition is the prerequisite for sound and healthy performance of the financial sector in the country. The study explores the impact of macroeconomic environment on financial sector’s performance in Pakistan. In doing so, it employs the Fully Modified Ordinary Least Square (FMOLS) approach for cointegration (long-run association) and error correction method for short-run relation. Also Ng-Perron test is used to find out the integrating order of the running variables. The present paper reveals that previous policies of financial institutions and economic growth have improved the level of financial development. Increases in both government spending as well as foreign remittances push the performance of the financial sector upwards. Contrarily, the efficiency of financial markets deteriorates on account of rising inflation due to its damaging impact, while literacy rate has a negative influence on the banking sector in Pakistan. Trade openness along with improved capital inflows open new directions to improve the development of financial markets in the country. Further, performance of the financial sector is attached to qualified institutions. The high savings rate declines the efficiency of banking sector and political instability retards the performance of financial markets.

Suggested Citation

Shahbaz, Muhammad Qaiser and Shamim, S. M. Aamir and Aamir, Naveed, Macroeconomic Environment and Financial Sector’s Performance: Econometric Evidence from Three Traditional Approaches (May 18, 2010). The IUP Journal of Financial Economics, Vol. 8, Nos. 1 & 2, pp. 103-123, March & June 2010, Available at SSRN: https://ssrn.com/abstract=1610029

Muhammad Qaiser Shahbaz (Contact Author)

COMSATS Institute of Information Technology (CIIT) ( email )

Park Road
Chak Shahzad
Islamabad, North-West Frontier Province 44000
Pakistan

S. M. Aamir Shamim

Dawood Islamic Bank Ltd. ( email )

Trade Centre, I.I. Chundrigar Road
Karachi, 74000
Pakistan

Naveed Aamir

Social Policy and Development Centre ( email )

Karachi
Pakistan

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