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Does financial instability weaken the finance-growth nexus? A case for Pakistan

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  • Shahbaz, Muhammad
  • Malik, Muhammad Nasir

Abstract

The paper investigates whether financial instability weakens finance-growth nexus in case of Pakistan. In doing so ARDL bounds testing approach is used for cointegration among variables over the period of 1971-2005. The results show that financial instability does weaken finance-growth nexus. Trade openness increases economic growth through spillover effects. Increasing inflation retards economic growth i.e., lower inflation rates are necessary for sustained economic growth. Political instability impedes economic growth. The present study indicates new direction for policy makers to sustain the pace of economic growth and avoid financial crisis.

Suggested Citation

  • Shahbaz, Muhammad & Malik, Muhammad Nasir, 2011. "Does financial instability weaken the finance-growth nexus? A case for Pakistan," MPRA Paper 28666, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:28666
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    File URL: https://mpra.ub.uni-muenchen.de/28666/1/MPRA_paper_28666.pdf
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    References listed on IDEAS

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    1. Allen Berger & Iftekhar Hasan & Leora Klapper, 2004. "Further Evidence on the Link between Finance and Growth: An International Analysis of Community Banking and Economic Performance," Journal of Financial Services Research, Springer;Western Finance Association, vol. 25(2), pages 169-202, April.
    2. Alessandra Bonfiglioli & Caterina Mendicino, 2004. "Financial liberalization, bank crises and growth: Assessing the links," Economics Working Papers 946, Department of Economics and Business, Universitat Pompeu Fabra.
    3. Caprio, Gerard & Laeven, Luc & Levine, Ross, 2007. "Governance and bank valuation," Journal of Financial Intermediation, Elsevier, vol. 16(4), pages 584-617, October.
    4. Blejer, Mario I., 2006. "Economic growth and the stability and efficiency of the financial sector," Journal of Banking & Finance, Elsevier, vol. 30(12), pages 3429-3432, December.
    5. Caprio, Gerard Jr. & Klingebiel, Daniela, 1996. "Bank insolvencies : cross-country experience," Policy Research Working Paper Series 1620, The World Bank.
    6. Mohsen Bahmani-Oskooee & A. B. M. Nasir, 2004. "ARDL Approach to Test the Productivity Bias Hypothesis," Review of Development Economics, Wiley Blackwell, vol. 8(3), pages 483-488, August.
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    Cited by:

    1. Ionescu Cristian, 2012. "Financial Instability, Financial Development And Poverty," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 4, pages 142-145, December.
    2. repec:asi:ajoerj:2013:p:752-762 is not listed on IDEAS

    More about this item

    Keywords

    Financial Crisis; Financial Development; Economic Growth;

    JEL classification:

    • N1 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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