Inflation-Finance Nexus: A Case Study of Pakistan An Econometric ARDL Co-integration Approach

Muhammad Sabihuddin, Najeeb Nasir and Muhammad Shahbaz

MPRA Paper from University Library of Munich, Germany

Abstract: Economic literature reveals that inflation is harmful for the health of financial sector through its detrimental affects. The present study also confirms the relationship between inflation and financial sector’s performance. We employed ARDL bounds testing approach to investigate log run relationships and Error Correction Method (ECM) for short run dynamics. Our findings argue that inflation lowers the efficiency of financial intermediaries not in short run but also in long run. Financial sector improves its performance through its previous policies and development in both the periods. Real GNP per capita also promotes the development of financial sector through their causal channels. Government spending enhances the efficiency of financial institutions in long run. Human capital formation declines the performance of financial sector due to low quality of education.

Keywords: Finance; Inflation; ARDL Approach (search for similar items in EconPapers)
JEL-codes: B22 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cwa, nep-mac and nep-mon
Date: 2007-03-25
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