Relationship between Financial Sector Development and Sustainable Economic Development: Time Series Analysis from Pakistan

Abstract

The study empirically investigated the contribution of financial sector in sustainable economic development of Pakistan. Annual data were used from the period of 1973 to 2007. The main objectives of the study were to analyze the long run relationship between financial sector development and sustainable economic development along with direction of causality between financial sector indicators and sustainable development. Auto Regressive Distributed Lag (ARDL) bound testing technique for cointegration was applied to estimate the long run relationship. A stable long run relationship was found between financial sector indicators and the sustainable economic development. Error Correction coefficient was statistically significant. It was concluded that financial sector had positive impact on the sustainable economic development in short run as well as in the long run. Causality test revealed that financial sector development was the basis for economic development.