Foreign Capital and Investment in Pakistan: A Cointegration and Causality Analysis

Sharafat Ali, Waqas Hamid, Asghar Muhammad, Kalroo Raheel Abbas, Ayaz Muhammad and Khan Mukhtyar

MPRA Paper from University Library of Munich, Germany

Abstract: Present study is focused to examine the effects of foreign capital flows on domestic investment in Pakistan economy for the period of 1972-2013. Time series econometric techniques like unit root test, Johansen cointegration and Granger causality methods have been used for the data analysis. Long run cointegration relationship has been found between domestic investment and foreign capital flow variables. Unidirectional causality running from external debt stock, remittances and domestic saving to domestic investment has been found. The causality between external debt servicing and investment is bidirectional. Bidirectional causality is also observed between foreign direct investment and domestic investment but causality between investment and inflation is confirmed in neither direction. The results are statistically robust and the estimated model is stable. The study suggests some policy recommendations.

Keywords: External Debt; Debt Servicing; Investment; Remittances; Domestic Saving; Cointegration; Granger Causality; Pakistan. (search for similar items in EconPapers)
JEL-codes: C32 E31 F21 R53 (search for similar items in EconPapers)
Date: 2013, Revised 2013-04-28
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Published in Journal of Basic and Applied Scientific Research 4.4(2014): pp. 217-226

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