The Dynamics of Exports, Financial Development and Economic Growth in Pakistan: New Extensions from Cointegration and Causality Analysis

This paper explores the relationship between exports, financial development and economic growth in case of Pakistan. In doing so, the autoregressive distributed lag (ARDL) bounds testing approach to cointegration and error correction model are applied to test the long run and short run relationships, respectively. The direction of causality between the variables is investigated by the vector error correction model (VECM) Granger causality test and robustness of causality analysis is tested by applying innovative accounting approach (IAA). The analysis confirms cointegration for the long run relation between exports, economic growth and financial development in case of Pakistan. The results indicate that economic growth and financial development spur exports growth in Pakistan. The causality analysis reveals feedback hypothesis that exists between financial development and economic growth, financial development and exports, and, exports and economic growth. This study provides new insights for policy makers to sustain exports growth by stimulating economic growth and developing financial sector in Pakistan.