Financial Crises and Economic Growth in Pakistan: A Time Series Analysis

Abstract

The purpose of this research is to investigate causal relationship between economic growth and major indicators of financial crisis - inflation rate, interest rate and the volume of foreign debt - in Pakistan. This study also highlights the stability of the relationship between indicators of financial crisis and economic growth. The annual time series data ranging from 1972 to 2010 is used for the analysis. Johansen's co-integration test is used to check the stability of long run equilibrium relationship between the variables used in the study. The results indicate that is long run stable equilibrium relationship between economic growth and the three components of financial crisis in Pakistan. The estimates based on pair-wise Granger Causality test show that bidirectional causal relationship between economic growth and the each indicator of financial crisis considered in this study.

Keywords: macro economic variables, economic growth, co-integration, financial system