Analysis of Financial Development and Economic Growth in Pakistan

Abstract

The study is focused on the analysis of financial development and growth in Pakistan economy for the period of 1972-2011. Cointegration techniques and Granger causality test based on the block exogeneity (Wald test) has been applied for the analysis. The cointegration test confirmed the long run association among the inflation, credit to private sector, deposits, foreign direct investment, domestic savings and economic growth. The present study supports the “supply-leading” hypothesis in Pakistan economy. Granger causality test results show that there is bidirectional causality between inflation and growth, deposits and growth, and savings and growth. Furthermore, unidirectional causality is running from foreign direct investment to growth. The coefficient of the error correction has the correct sign and is statistically significant. The study also draws some conclusion and suggests some policy implications for the establishment of robust financial sector and setting up a strong growth trajectory of the economy.

Keywords: Finance, Economic Growth, inflation, Credit, Deposits, Foreign Direct Investment, Savings, Time Series, Cointegration, Causality, Pakistan

JEL Classification: C32, G21, O4, O16, P44