Economic Growth and Financial Development: Evidence from Panel Cointegration in India and Pakistan

The paper examines the long run relationship between finance development and economic growth in India and Pakistan over the period 1970-2010. Two different measures of finance development (private sector credit and liquidity liabilities ratio) are captured in order to study the nexus between finance development and economic growth. The findings, however, suggest that finance development does not have substantial impact on economic growth, both in India and Pakistan. On the contrary, finance-growth nexus is considerably influenced by other factors such as trade openness and inflation. For India, it finds the existence of bidirectional causality between inflation and economic growth and a unidirectional causality from trade openness to finance development, from inflation to trade openness, from economic growth to trade openness, and from financial development to inflation. For Pakistan, it finds the bidirectional causality between openness and inflation and a unidirectional causality from economic growth to inflation and from trade openness to finance development. The panel causality latterly suggests the unidirectional causality from economic growth to finance development and from inflation to trade openness. It also finds the bidirectional causality between inflation and economic growth, between trade openness to finance development and between trade openness to economic growth.