Financial development, trade openness and economic growth in Pakistan: A granger causality approach

Abstract

This study aims to examine the direction of causality between financial development, trade openness and economic growth in Pakistan over the period 1970 to 2014. For this undertaking, statistical tools such as ADF and P-P unit root tests have been used to check stationery of the series and Cointegration test has been used to determine the long run relationship between the study variables. The causality relationship among variable is examined by Granger causality approach. The result of ADF test revealed that all variables become stationery at first difference which confirm to co integration test. Furthermore, the results of Johansen Co integration test indicate that there is existence of a long run relationship between the variables. On the other hand, the results of Granger causality test show that there is a causality relationship which is bi-directional running from economic growth to financial development. While, the results show that there is also causality relationship which is bi-directional running from trade openness to financial development. Our study results revealed that unidirectional causality relationship found out between trade openness to economic growth. The results suggest that financial development and trade openness plays an important role in boosting economic growth in Pakistan.

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