The Causal Nexus between Financial Development and Manufacturing Sector: Empirical Study for Pakistan

Abstract

The empirical analysis of the causal nexus among financial development and the manufacturing sector in Pakistan provides significant insights into the elaborate association among these two critical components of the economy. Besides, fiscal policy is used as a control variable. The study used unit root tests to identify the level of integration of the data and concluded that all variables are integrated at first difference which allow use to employ Johansen cointegration test to detect the long run cointegration among variables. Furthermore, the study utilized the VECM to examine the casual association among variables and concluded that the two-way causality among financial development and manufacturing sector in long run as well as in short run. Similarly, fiscal policy is granger causing financial development and manufacturing sector in long run only while fiscal policy is not causing financial development and manufacturing sector in short run. Moreover, financial development and manufacturing sector is granger causing fiscal policy in short run only. The results of the study suggested that to enhance the manufacturing sector's growth, it is crucial to strengthen the financial sector through targeted fiscal policies that promote long-term stability and access to credit.