Does Human Capital Reinvigorate the Relationship Between Financial Development and Economic Growth: Evidence from Pakistan

Rameez Tariq (), Abdul Rahman and Muhammad Arshad Khan
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Rameez Tariq: Department of Management Sciences, COMSATS University Islamabad, Pakistan, Postal: Islamabad, Islamabad Capital Territory, Pakistan
Abdul Rahman: Department of Management Sciences, COMSATS University Islamabad, Pakistan
Muhammad Arshad Khan: Department of Economics, COMSATS University Islamabad, Pakistan

Asian Journal of Applied Economics/ Applied Economics Journal, 2023, vol. 30, issue 2, 100-119

Abstract: This study examines the threshold level of human capital necessary for the finance-growth nexus in Pakistan. For a deeper understanding of the finance-growth relationship, we have disaggregated financial development into financial institution development and financial market development. To achieve this, we have employed the threshold regression model over the period from 1980 to 2018. The results of this study indicate that economic growth responds negatively to overall financial development when the level of human capital surpasses the threshold of 1.489. Similarly, when financial market development falls below the aforementioned threshold, its impact on economic growth is found negative. This suggests that financial market development does not contribute favorably to economic growth. However, the development of financial institutions contributes positively and significantly to economic growth when conditioned on the level of human capital. Among the other variables, physical capital, trade openness, and government expenditure exert a positive impact on economic growth. In contrast, the inflation rate has an insignificant impact on economic growth. The findings of this study suggest the need for further reforms in the financial sector policies in alignment with international best practices. These policies should also take into consideration the importance of redesigning and strengthening the human capital skills necessary to stimulate the finance-growth nexus.

Keywords: human capital; finance-growth nexus; threshold regression; Pakistan (search for similar items in EconPapers)
JEL-codes: C21 C24 F43 J24 O47 (search for similar items in EconPapers)
Date: 2023
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