Abstract
Economic theory suggests that sound and efficient financial systems channel capitals to its most productive uses are beneficial for economic growth. Sound and efficient financial systems are especially important for sustaining growth in developing countries. This paper examines the impact of banking sector liberalization on long-term economic growth in Pakistan by using a time series data for the period 1971–2011. The results show that there exist a significant positive long run relationship between banking sector development and economic growth in the country. The sensitivity analysis also shows that the relationship remain positive and significant no matter what combination of the omitted variables are used in the basic model. Thus, our findings support the core idea that banking sector development stimulates long term economic growth in a country.
Highlights
The role of banking sector is more crucial in developing countries as the financial sector provides the financial services to the rest of the economy
The results showed that findings show that financial liberalization leads to financial development in all the study countries, it Granger-causes economic growth only in Zambia
We examine the long-run relationship between banking sector liberalization and economic growth for Pakistan for the period 1971 to 2011
Summary
The role of banking sector is more crucial in developing countries as the financial sector provides the financial services to the rest of the economy. Banking sector liberalization and economic growth: case study of Pakistan nisms, led to financial repression, and slower the economic development For these reasons, governments became increasingly aware that government’s intervention in the financial system has failed. The establishment of an inter-bank foreign exchange market marked an important step towards decentralizing the management of foreign exchange and allowing market forces to play greater role in exchange rate determination As argued by Arestis et al (2001: 17), ‘time series methods can provide useful insights into differences of this financial development and economic growth relationship across countries and may illuminate important details that are hidden in averaged-out results.
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