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Financial Development and Economic Growth: The Case of Pakistan

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  • Khan, Arshad
  • Qayyum, Abdul
  • Sheikh, Saeed

Abstract

This paper has examined the empirical relationship between financial development and economic growth in Pakistan over the period 1971–2004. The results show that, in the long run financial depth and real interest exerted positive impact on economic growth. The share of investment is although positively correlated to real income, but remained insignificant. Furthermore, in the short run economic growth is positively and significantly affected by changes in the share of investment. Moreover, changes in real interest rate exerted positive (negative) impact on growth. However, the response of real interest rate is very small in the short run. The feed back coefficient is negative and significant, suggesting about 0.06 percent disequilibrium in the previous period is corrected in the current year. We find a stable long run relationship between economic growth and financial depth. Unlike Ireland (1994) and Demetriades and Hussein (1996), our findings are consistent with the view that economic growth is an outcome of the financial development.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 2145.

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Date of creation: 2005
Date of revision: 2005
Publication status: Published in The Pakistan Development Review 4.44(2005): pp. 819-837
Handle: RePEc:pra:mprapa:2145

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Keywords: Financial development; Economic growth; Pakistan;

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  1. Benhabib, Jess & Spiegel, Mark M, 2000. " The Role of Financial Development in Growth and Investment," Journal of Economic Growth, Springer, Springer, vol. 5(4), pages 341-60, December.
  2. Greenwood, Jeremy & Smith, Bruce D., 1997. "Financial markets in development, and the development of financial markets," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 21(1), pages 145-181, January.
  3. Klaus Neusser & Maurice Kugler, 1998. "Manufacturing Growth And Financial Development: Evidence From Oecd Countries," The Review of Economics and Statistics, MIT Press, vol. 80(4), pages 638-646, November.
  4. Panicos O Demetriades & Kul B Luintel, 2000. "Financial Restraints in the South Korean Miracle," Discussion Papers in Economics, Department of Economics, University of Leicester 00/5, Department of Economics, University of Leicester.
  5. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, Elsevier, vol. 22(1), pages 3-42, July.
  6. Kapur, Basant K., 1992. "Formal and informal financial markets, and the neo-structuralist critique of the financial liberalization strategy in less developed countries," Journal of Development Economics, Elsevier, Elsevier, vol. 38(1), pages 63-77, January.
  7. Levine, Ross, 1996. "Financial development and economic growth : views and agenda," Policy Research Working Paper Series, The World Bank 1678, The World Bank.
  8. Demetriades, Panicos O. & Hussein, Khaled A., 1996. "Does financial development cause economic growth? Time-series evidence from 16 countries," Journal of Development Economics, Elsevier, Elsevier, vol. 51(2), pages 387-411, December.
  9. Mohsen Bahmani-Oskooee & Raymond Chi Wing Ng, 2002. "Long-Run Demand for Money in Hong Kong: An Application of the ARDL Model," International Journal of Business and Economics, College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan, College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan, vol. 1(2), pages 147-155, August.
  10. M.O. Odedokun, 1998. "Financial intermediation and economic growth in developing countries," Journal of Economic Studies, Emerald Group Publishing, Emerald Group Publishing, vol. 25(3), pages 203-224, September.
  11. Beck, Thorsten & Levine, Ross & Loayza, Norman, 1999. "Finance and the sources of growth," Policy Research Working Paper Series, The World Bank 2057, The World Bank.
  12. Panicos O. Demetriades & Philip Arestis, 1996. "Financial Development and Economic Growth: Assessing the Evidence," Keele Department of Economics Discussion Papers (1995-2001), Department of Economics, Keele University 96/16, Department of Economics, Keele University.
  13. Beck, T.H.L. & Levine, R. & Loayza, N., 2000. "Financial intermediation and growth: Causality and causes," Open Access publications from Tilburg University, Tilburg University urn:nbn:nl:ui:12-3125519, Tilburg University.
  14. King, Robert G & Levine, Ross, 1993. "Finance and Growth: Schumpeter Might Be Right," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 108(3), pages 717-37, August.
  15. Luintel, Kul B. & Khan, Mosahid, 1999. "A quantitative reassessment of the finance-growth nexus: evidence from a multivariate VAR," Journal of Development Economics, Elsevier, Elsevier, vol. 60(2), pages 381-405, December.
  16. Rehana Siddiqui, 2004. "Energy and Economic Growth in Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, Pakistan Institute of Development Economics, vol. 43(2), pages 175-200.
  17. Bahmani-Oskooee, Mohsen & Bohl, Martin T., 2000. "German monetary unification and the stability of the German M3 money demand function," Economics Letters, Elsevier, Elsevier, vol. 66(2), pages 203-208, February.
  18. Chandavarkar, Anand, 1992. "Of finance and development: Neglected and unsettled questions," World Development, Elsevier, Elsevier, vol. 20(1), pages 133-142, January.
  19. King, Robert G. & Levine, Ross, 1993. "Finance, entrepreneurship and growth: Theory and evidence," Journal of Monetary Economics, Elsevier, Elsevier, vol. 32(3), pages 513-542, December.
  20. International Monetary Fund, 2004. "Financial Sector Development in the Middle East and North Africa," IMF Working Papers, International Monetary Fund 04/201, International Monetary Fund.
  21. Ireland, Peter N, 1994. "Money and Growth: An Alternative Approach," American Economic Review, American Economic Association, American Economic Association, vol. 84(1), pages 47-65, March.
  22. Demetriades, Panicos O & Luintel, Kul B, 1996. "Financial Development, Economic Growth and Banker Sector Controls: Evidence from India," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 106(435), pages 359-74, March.
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