EconPapers    
Economics at your fingertips  
 

Regime-specific impact of financial reforms on economic growth in Pakistan

Abdul Rahman, Muhammad Arshad Khan and Lanouar Charfeddine

Journal of Policy Modeling, 2021, vol. 43, issue 1, 161-182

Abstract: This study uses and proposes a new methodological approach to construct a financial liberalization index on the basis of the dynamic factor model technique. The resulting index is used to investigate the impact of the financial sector reforms in Pakistan on economic growth. Using the Markov regime-switching model over the period 1972–2015, the empirical results showed that the examined relationship is nonlinear, nonmonotonic, state-dependent, and better described by the two-state Markov switching model characterized by the high growth regime and low growth regime. Despite the positive impact of financial liberalization on economic growth in both the high and low growth regimes, financial liberalization relatively strongly affects real GDP growth in the high growth regime. The results further demonstrate that transition probabilities establish an inordinate episode of the low growth regime. Furthermore, the high growth regime is relatively short-lived than the low growth regime. Among the other variables, trade openness and physical capital stock have a positive impact on economic growth, while labor force and government expenditure exert a negative effect on economic growth. Several economic policies are proposed and discussed for better functioning of financial sector development in Pakistan.

Keywords: Financial liberalization; High and low economic growth; Dynamic factor model; Markov switching model; Nonlinear relationship (search for similar items in EconPapers)
JEL-codes: C24 F43 O43 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0161893820301228
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jpolmo:v:43:y:2021:i:1:p:161-182

DOI: 10.1016/j.jpolmod.2020.10.006

Access Statistics for this article

Journal of Policy Modeling is currently edited by A. M. Costa

More articles in Journal of Policy Modeling from Elsevier
Bibliographic data for series maintained by Catherine Liu ().

 
Page updated 2021-06-30
Handle: RePEc:eee:jpolmo:v:43:y:2021:i:1:p:161-182