Abstract
This study investigates the financial development–economic growth relationship in Pakistan over the period 1975–2017 using the Markov Switching methodology. The financial development index has been constructed using the principal component analysis. Unexpectedly, the empirical result shows that financial development contributing negatively to economic growth in the high and the low economic growth regimes in Pakistan. Moreover, the results indicate that labor force retards economic growth with a higher magnitude. A significant positive effect of gross fixed capital formation on economic growth is also observed. The results reveal that policymakers may revisit the financial development policies so that the financial sector may contribute positively to economic growth process in Pakistan. In this respect, more steps are needed to further liberalize the financial sector to enhance economic growth in Pakistan.
Highlights
It is well established that financial sector plays an important role in economic growth (Chung et al, 2019)
We started our investigation with descriptive analysis and the results are reported in Table 2 (Panel A), whereas results with respect to correlation analysis are reported in Panel B of Table 2
The statistics reveal that the highest level of economic growth was 0.065 that coincides to the year 1980, while the lowest level of economic growth was −0.015 which corresponds to the year 1997 when the economy was in the recession
Summary
It is well established that financial sector plays an important role in economic growth (Chung et al, 2019). Numerous theoretical and empirical studies (e.g., Asteriou & Spanos, 2019; Caporale et al, 2014; Gurley & Shaw, 1955; King & Levine, 1993; Levine, 2005; McKinnon, 1973; Naveed & Mahmood, 2019; Schumpeter, 1911) identified multiple channels through which financial markets exerts positive impact on economic growth across countries. The present study examines regime-specific relationship between financial development and economic growth in Pakistan To this end, we employed the Markov switching ( MS) approach which is useful to deal with regimespecific relationship among macroeconomic variables. Section “Empirical Findings” discusses empirical results, section “Conclusion” delineates conclusion of the study, while section “Policy Recommendations” presents policy recommendations and directions of future research
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