Impact of Financial Development Indicators on Economic Growth in Pakistan: Empirical Evidence from Time Series Data Analysis

Abstract

The Current research has analyzed impacts of financial development both short run and long run, on economic growth of Pakistan during the period 1980-2014. To measure financial development, study has utilized principal component analysis (PCA) to form a single proxy index that covers four important dimensions such as banking and non-banking financial institutions and both financial access and markets simultaneously. It consists of five financial development ratios e.g. financial system deposits to GDP, private sector credit of banks to GDP, commercial bank assets to commercial and central banks assets, foreign direct investments to GDP and financial market capitalization to GDP. Empirical findings suggest that long run relationship is more evident in case Pakistan’s context for financial development and growth of an economy. While the mechanism of short run dis-equilibrium adjustment in case of estimated, error correction model is expected towards the long run relation. Policy makers can use results for parallel and successful expansion of both financial and economic development.