Abasyn Journal of Social Sciences. Vol.10 No.2

Analyzing the Effects of Financial Development on Economic Growth: Empirical Evidence from Pakistan through PCA Approach

Mohammad Rizwan-ul-Hassan, Syed Ghazanfer Imam, Shujaat Salim

1 Department of Economics, Mohammad Ali Jinnah University
2 Department of Finance, Mohammad Ali Jinnah University
3 Department of Finance, Mohammad Ali Jinnah University


The study examines the relationship between financial sector development and economic growth of Pakistan for a period from 1981 to 2015.Using annual time series data, an econometric  model is developed on the basis of theoretical frame work in line with previous research . To capture various dimensions of financial development an index is constructed by PCA technique  through utilizing relevant proxies of financial sector development. ARDL bound testing approach is applied to identify long run relationship and short run dynamics between financial  development and economic growth. Other econometric tests conducted to test stability and reliability of the model. Findings of the econometric estimation reveal that a significant long run  association exists among the variables while financial depth and rate of investment have positive significant effect on economic performance of the country. Results reflect the importance of financial sector development for  economic growth of Pakistan and draw attention of policy makers for further strengthening the financial sector of Pakistan.
Keywords: Financial depth; Financial repression; Economic growth; Capital accumulation




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