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The degree of international financial integration has seen a drastic change recently, especially during the last two decades. This study attempts to explore the relationship between international financial integration and economic growth in the context of Pakistan through a sample of data from 1975 to 2013 using time series analysis. International financial integration is used as an index that comprises foreign direct investment, remittances, and external debts. The results indicate that international financial integration has a significant and negative effect on economic growth. Cointegration results have found a significant and long run relationship, whereas variance decomposition method shows bidirectional causal relationship. The sensitivity analysis proves that the initial result is robust through fully modified ordinary least square method, while Cusum and Cusum of square proves stability of coefficients over a long period.

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Purpose The purpose of the study is to investigate the relationship between international financial integration (IFI) index and democracy (DEM) in Pakistan by using long-time series data from 1975 to 2013. Design/methodology/approach The IFI index is constructed by principal component analysis. IFI consists of foreign direct investment (FDI), remittances (REM) and external debt (ED), whereas the Polity IV index is used for DEM. Johansen and the autoregressive distributed lag method for cointegration methods are used to find a long run relationship. Dynamic ordinary least square (DOLS), fully modified ordinary least square (FMOLS) and canonical regression (CR) have been used to find the nature of the relationship. Rolling window analysis has been done to find the year wise coefficients. Findings DOLS, FMOLS, canonical regression CR and cointegration results suggest a significant negative long-run relationship between IFI and DEM in Pakistan. Rolling windows analysis highlights that DEM has improved IFI in Pakistan from 2008 to 2013. Originality/value This study constructs an index for financial integration using principle component analysis on capital inflows, i.e. FDI, REM, ED, to explore the impact of DEM on IFI in Pakistan from 1975 to 2013. This study investigates for the first time ever the relationship between IFI index and DEM in Pakistan.