Economic Growth and Financial Intermediation Nexus in Pakistan: An ARDL Analysis

Abstract

This paper explores the relationship between economic growth and financial intermediation in Pakistan. By utilizing data from 1996 to 2022, presence of cointegration in the long run is investigated by employing the auto regressive distributed lag (ARDL) bounds testing approach, whereas error correction model (ECM) is used to depict short run linkages. The augmented dickey fuller (ADF) test verifies the stationarity properties of the series. The results show that financial intermediation promotes economic growth both in short run as well as in long run and confirm the view of Schumpeter regarding finance growth nexus. The findings also reveal that investment and human development also significantly contribute to productivity and economic expansion whereas public expenditure exhibits a positive but insignificant effect due to crowding out effects. The study found that despite improvements in Pakistan's financial structure, sustainable economic growth requires an enabling investment climate and robust governance which can be achieved by implementing suitable reforms for development of a well-organized financial sector.