The Causal Relationship between Financial Development, Financial Globalization and National Savings in Pakistan

Abstract

Financial globalization has a role in transmitting information within financial markets and helps in financial development. Additionally, financial globalization facilitates risk diversification alleviates the negative consequences of economic recessions, enabling nations to engage in international borrowing and lending activities, thus stabilizing income, consumption, investment and savings levels. This research study analyzes the causal nexus between financial development, financial Globalization and national savings in Pakistan. Co-integration test indicates co-integration vector henceforth, there is relationship between variables in the long run. The causal relation is determined through vector error correction mechanism and it is found that there is long run bidirectional causality between financial development, financial globalization and national savings in Pakistan. This study recommends that monetary authorities in Pakistan to encourage financial inclusion as the ratio of account holders in financial sector is very low. This will encourage documented economy and savings will be channelized to productive sectors. Likewise, financial development up gradation with par with international standards will not only encourage domestic savings but also help in financial globalization.