Financial Development, International Trade and Economic Growth: Empirical Evidence from Pakistan

Shaheen, Safana and Awan, Masood Sarwar and Waqas, Muhammad and Aslam, Muhammad Amir (2011): Financial Development, International Trade and Economic Growth: Empirical Evidence from Pakistan. Published in: Romanian Journal of Fiscal Policy , Vol. 2, No. 2 (2011): pp. 11-19.

Abstract

The study utilizes the Autoregressive-distributed lag (ARDL) approach for cointegration and Granger causality test, to explore the long run equilibrium relationship and the possible direction of causality between international trade, financial development and economic growth for the Pakistan economy. Imports plus exports of goods and services is used as a proxy for international trade, while broad money (M2) and gross domestic product (GDP) are used as the proxies for financial development and economic growth, respectively. Result explores a long run relationship between the variables. In case of Pakistan, economy supply leading hypothesis is accepted. Moreover, unidirectional causality is observed from international trade to economic growth and from financial development to international trade.

• Item Type: MPRA Paper
• Language: English
• Keywords: Financial development, international trade, economic growth, Pakistan
• Subjects: O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O16 - Financial Markets ; Saving and Capital Investment ; Corporate Finance and Governance

References

Anwar, S.; Shabir, G.; Hussain, Z., 2011. Relationship between Financial Sector Development and Sustainable Economic Development: Time Series Analysis from Pakistan. International Journal of Economics and Finance, Vol. 3, pp: 262-270.

Balaguer, J.; Cantavella-Jorda, M., 2002. Tourism as a long-run economic growth factor: the Spanish Case. Applied Economics, Vol. 34, pp: 877–84.

Banerjee, V.; Newman, A.F., 1993. Occupational Choice and the Process of Development. Journal of Political Economy, Vol. 101, pp:274-298.

Bahmani-Oskooee, M.; Nasir, A., 2004. ARDL Approach to Test the Productivity Bias Hypothesis. Review of Development Economics J., Vol. 8, pp: 483-488.

Brown, J. C.; Dryburgh, J. R.; Ross, S. A., and Dupre, J., 1975. Identification and actions of gastric inhibitory polypeptide. Recent Progress in Hormone Research, Vol. 31, pp:487-532.

Calderon, C.; Liu, L., 2003. The direction of causality between financial development and economic growth. Journal of Development Economics, Vol. 72, pp: 321–34.

Chang, T., 2002. Financial development and economic growth in mainland China: a note on testing demand following or supply-leading hypothesis. Applied Economic Letters, Vol. 9, pp:869–73.

Chow, P. C. Y., 1987. Causality between export growth and industrial development: empirical evidence from the NICs. Journal of Development Economics, Vol. 26, pp:55–63.

Ghatak, S.; Siddiki, J. U., 2001. The use of the ARDL approach in estimating virtual exchange rates in India. Journal of Applied Statistics, Vol.28, pp:573-583.

Goldsmith, R.W., 1969. Financial Structure and Development. New Haven, CT: Yale University Press.

Gurley, J.; Shaw, E., 1955. Financial aspects of economic development. The American Economic Review, Vol. 45, pp: 515–38.

Gurley, J.; Shaw, E., 1967. Financial structure and economic development. Economic Development and Cultural Change, Vol. 34, pp: 333–46.

Gupta, K. L., 1984. Finance and Economic Growth in Developing Countries. London: Croom Helm.

Jenkıns, H. P.; Katırcıoglu, S. T., 2010. The bounds test approach for Cointegration and causality between financial development, international trade and economic growth: the case of Cyprus. Applied Economics, Vol. 42, pp: 1699–1707.

Jung, W. S., 1986. Financial development and economic growth: international evidence. Economic Development and Cultural Change, Vol. 34, pp:336-46.

Khan, M.A., 2010. Financial Development and Economic Growth in Pakistan: Evidence Based on Autoregressive Distributed Lag (ARDL) Approach. South Asia Economic Journal, Vol. 9, pp:375–391.

Khatkhate, D. R., 1972. Analytic basis of the working of monetary policy in less developed countries. IMF Staff Papers, Vol. 19, pp:533–58.

Khatkhate, D. R., 1988. Assessing the impact of interest rate in LDCs. World Development, Vol. 16, pp:557–88.

King, R. G.; Levine, R., 1993. Finance and growth: Schumpeter might be right. Quarterly Journal of Economics, Vol. 108, pp: 717–38.

Kletzer, K.; Bardhan, P., 1987. Credit markets and patterns of international trade. Journal of Development Economics, Vol. 27, pp:57–70.

Laurenceson, J., and Chai. J., 2003. Economic development and financial reform in China. Edward Elgar, Cheltenham.

Levine, R., Loayza, N.; Beck, T., 2000. Financial intermediation and growth: causality analysis and causes. Journal of Monetary Economics, Vol. 46, pp: 31–77.

McKinnon, R.I., 1973. Money and Capital in Economic Development. Washington D.C.: The Brookings Institution.

Mazuar, E. A.; Alexander, W. R. J., 2001. Financial sector development and economic growth in New Zealand. Applied Economic Letters, Vol. 8, pp: 545–49.

Neusser, K.; Kugler, M., 1998. Manufacturing growth and financial development: evidence from OECD Countries. Review of Economics and Statistics, Vol. 80, pp:638–46.

Patrick, H. T., 1966. Financial development and economic growth in underdeveloped economies. Economic Development and Cultural Change, Vol. 14, pp:174–89.

Pesaran, M. H.; Shin, Y., 1996. Cointegration and speed of convergence to equilibrium. Journal of Econometrics, Vol.71, pp:117-143.

Pesaran, M. H.; Smith, R. P., 1998. Structural Analysis of Cointegrating VARs. Journal of Economic Surveys, Vol. 12, pp:471-505.

Pesaran, M.H.; Pesaran, B., 1997. Working with Microfit 4.0: Interactice Econometric Analysis, Oxford University Press.

Pesaran, M. H., Shin, Y.; Smith, R. J., 2001. Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, Vol. 16, pp:289–326.

Schumpeter, J. A., 1911. The Theory of Economic Development. Cambridge, MA: Harvard University Press.

Shaw, E.S. ,1973. Financial Deepening in Economic Development. New York: Oxford University Press.

Wijnbergen, V., 1982. Stagflationary effects of monetary stabilization policies: a quantitative analysis of South Korea. Journal of Development Economics, Vol. 10, pp:133–69.

Wijnbergen, V., 1985. Macroeconomic effects of changes in bank |interest rates: simulation results for South Korea. Journal of Development Economics, Vol. 18, pp:541–54.

Xu, X., 1996. On the causality between export growth and GDP growth: an empirical reinvestigation. Review of International Economics, Vol. 4, pp:172–84.

Waqas, M.; Awan, M. S.; Aslam, M. A., 2011. We are living on the cost of our children. Interdisciplinary Journal of Contemporary Research in Business, Vol. 2, pp:607-623.