Does Financial Development Promote Industrial Production in Pakistan? Evidence from Combined Cointegration and Causality Approach

Abstract

This study investigates the impact of financial development on industrial production from 1972 to 2014 in Pakistan. We use the Bayer and Hanck (2013, Journal of Time Series Analysis 34(1), 83–95,) combined cointegration technique to predict the long-run relationship between financial development, saving and industrial production. The results predict three cointegration vectors which confirm the existence of a long-run relationship between underlying variables. The empirical evidence shows a positive impact of financial development and savings on industrial growth in the long run as well as in the short run. The result of the VECM (Vector Error Correction Model) Granger causality confirms the bidirectional causality between financial development and industrial production in the long run. The variance decomposition approach shows that financial development has major contributions in explaining industrial production. The impulse response function also confirms the results of variance decomposition. This research opens new insights for policymaking.