Financial Development and Economic Growth: The Case of Pakistan

Muhammad Khan, Abdul Qayyum and Saeed Sheikh

MPRA Paper from University Library of Munich, Germany

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.

Keywords: Financial development; Economic growth; Pakistan (search for similar items in EconPapers)
JEL-codes: O16 (search for similar items in EconPapers)
Date: 2005, Revised 2005
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Citations: View citations in EconPapers (59)

Published in The Pakistan Development Review 4.44(2005): pp. 819-837

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