Nonlinearities in Financial Development and Economic Growth Nexus: Evidence from Pakistan
Received Date: Jan 17, 2019 / Accepted Date: Mar 22, 2019 / Published Date: Mar 29, 2019
The purpose of the study is to examine the nonlinear relationship between financial development and economic growth nexus in the case of Pakistan. The sample period was taken from 1972 to 2017. The empirical results of nonlinear innovative technique showed the threshold effect in the relationship between financial development and economic growth. We found the threshold level of financial development for Pakistan, after this threshold level, the financial development effects' economic growth adversely. In pre-threshold regime, financial development is the lesser negative effect but in the post-regime the magnitude increases. Both pre and post threshold level of financial development is statistically insignificant. These findings reveal that more finance is not good for economy and to facilitate the economic growth country’s highlight the optimal financial development level.
Keywords: Financial development; Threshold level; Economic growth
Financial development is defined as the improvement in the intermediation process of a financial sector with the help of appropriate policies and institutions. The enhancement of financial development would be the source of higher savings and investment level. The strong financial sector presents the efficiently capital allocation and more risk. The more speedily financial sector developed; new services are offered from financial sector. Economic growth term is used to articulate the economic progress of the country. Mostly, increase in the volume of goods represents its growth and measured quantitatively. So, if factors of productions are used appropriately and technological innovations also incorporated in the production process due to this, the level of national production boost up, which correspond to an addition to the volume of goods produced by the economy. On the other side, if national income, savings, investment, expenditure and output increase in the country, then this marvel is recognized as economic growth. Economic theory suggests that financial sector is the key contributed to growth. As the efficient credit allocation to the productive sectors of the economy at reasonable cost, the overall economy grows inclusively. The past studies remain general on the relationship between financial development and economic growth. These studies lead to diversity of conclusions.
Notwithstanding of research environment, there are four possible directions of finance-growth nexus recognized. First, finance leads growth view, which is evidenced in most of the notable studies, including Schumpeter , Schumpeter , McKinnon  and Shaw . This view proposed that economic growth follows finance by an initial expansion as the demand and delivery of financial services. There are two channels through which finance effects on output: i) promoting savings and investment and ii) allocation of funds to the productive sector which enhance the efficiency of capital accumulation . Other empirical studies also supported this view [6-9]. Second, the economic growth leads finance. This view is innovative by Robinson , which states that economic growth becomes a source of the steady increase in the demand for financial services. The view of growth-led-finance is also supported by Demetriades and Hussein  and Ireland . Third, mutual causality in the finance-growth nexus. Previously, the bi-directional causality in finance-growth relationship was proposed. Luintel and Khan  and Al-Yousif  examined the bi-directional causality in the finance-growth and hypothesized that the causality between financial development and economics growth could either start from the economic growth or financial development. Final, no causal relationship between financial development and economic growth. Financial development is neither a cause of economic growth nor effect.
Earlier studies are based on the linear model to study the financegrowth relationship and overlooked the possibility of a non-linear link between financial development and economic growth1. Keeping in mind the paramount importance of financial development in the economic growth process, the Government of Pakistan embarked on a series of financial sector reforms in the late 1980s and the early 1990s. The objectives of these reforms were to create a level-playing field for financial institution by eliminating entry barriers and accelerating competition among the financial institutions, removing distortions and financial market's segmentation, eliminating direct and subsidized credit programs and strengthening the supervisory role of the State Bank of Pakistan [14-16]. This policy shift may distort the linear relationship between financial development and economic growth and provide the justification for the non-linear analysis of financial development and economic growth. The non-linear relationship suggests that economic growth may respond differently in case where the level of financial development remains below or above the minimum threshold level of financial development. In other words, changes in financial development policies might influence the level of financial development and economic growth differently in a different state of policy intervention [17-19]. International Monetary Fund (2015) noted that the impact of financial development on economic growth is only positive when it reaches at the certain threshold level; thereafter, its impact on economic growth becomes negative. Ibrahim and Alagidede  found that the finance-growth relationship is a non-linear and inverted U-shaped.
This study contributes to the finance-growth literature in following way: The majority of the previous studies focused on the linear relationship between financial development and economic growth in developing and developed countries. However, the proposition of linear relationship between financial development and economic growth is restrictive, especially when policy intervention occurs in the economy . The exclusive research on the non-linear relationship between financial development and economic growth is scarce. To the best of our knowledge, there exists no single study, which attempts to determine the threshold level of financial development for Pakistan. This study, therefore, examines the non-linear relationship between financial development and economic growth in the presence of threshold effects in Pakistan.
Overview of Pakistan Financial Sector
An efficient financial system is necessary for economic growth of a country. The financial system of Pakistan was inefficient and undiversified, while the position of financial institutions is not good due to poor governance, insufficient capital, high level of non-performing loans and high intermediation cost. To remove these issues of the financial sector, the Government of Pakistani started financial reforms under the umbrella of the International Monetary fund (IMF) and the World Bank (WB) within the framework of Structural Adjustment Programs (SAP) in the early 1990s. The SAP includes a series of deregulations and liberalization polices, including the economic and financial sector reforms. The financial reforms can be divided into three phases. The first phase of reforms was started from 1991 to 1997. Under the first phase of reforms, the nationalization Act 1974 was changed to enhance the banking sector performance by privatization of nationalized commercial banks. In 1991, Muslim Commercial Bank (MCB) and Allied Bank Limited (ABL) were partially privatized. In 1994, the external account was liberalized and the Credit Deposit ratio publicly offered in the late 1995. At that time the interest rate also liberalized and set by the market forces. The second phase of reforms was started from 1998 to 2001. During this phase, to enhance the competitive environment in the banking sector, the entry barriers were removed in the banking sector, and some commercial banks are completely privatized. Additionally, the exchange rate regime was liberalized in the mid-2000. In the third phase of financial reforms, the Investment Corporations of Pakistan and United bank Limited (UBL) were privatized. The Prudent Regulations for agriculture financing were implemented in 2005, which facilitated specialized and commercial banks to offer agri-financing schemes. The Prudent Regulations phase II regarding Small and Medium Enterprises (SME) and consumer financing was also issued in 2009.
These financial sector reforms have positively impacted financial development and economic growth in Pakistan. After the successful implementation of financial reforms, following major economic developments were observed. Improved output level and sales, Money and Security market development, establishment of the efficient regulatory system of financial sector and decrease in poverty level, all together enhance economic growth in the countries. At present, banking sector is playing the positive role in economic growth by upgrading skills and innovative techniques. The State Bank of Pakistan (SBP) has been made efforts to make the inclusive financial system by focusing its lending activities in the agriculture and the SMEs. The efficiency of the financial system, especially banking sector depends on the development of the foreign exchange market, capital market performance and advances to private sector (The Economist, 2018). As Pakistan moves up the global financial innovations and technology ranking, it will be imperative to develop diversified and globally competitive financial sector. Hence, Pakistan needs to improve the financial system to expand the financial institutions geographically and through financial literacy expand the practice of financial services.
The finance-growth nexus discussion has been started since Schumpeter  put the views on importance of financial development for economic growth. Financial development contributes to the economic growth through innovations and technological advancement. After that, Goldsmith , McKinnon  and Shaw  reinforced the positive relationship between financial development and economic growth. Patrick  proposed two hypotheses on the relationship between financial development and economic growth. First, Supply leading hypothesis, which hypothesized that financial system development, plays an important role to sustain the economic growth. Through pooling of resources, risk management and intermediary function, financial system contributes positively towards the economic growth . The finance-led-growth hypothesis was tested by a number of researchers using the panel and cross-sectional data. For instance, Luintel and Khan  examined the relationship between financial development and economic growth in ten developing countries and found significant support for the validity of the finance-led growth hypothesis. De Gregorio and Guidotti  examine the causal relationship between financial system development and economic growth by using cross-countries and panel data. The results showed positive relationship in cross-sectional data and negative relationship for Latin America. The reason behind this negative relationship is the high level of financial liberalization and poor banking regulations.
Second hypothesis is the demand-following hypothesis which advocated the unidirectional causality running from economic growth to financial system development. Robinson  argued that financial development followed the enterprise at the initial stage of financial development. Kuznets  supported this argument and found that the nature of the economic cycle significantly affected financial system development. Arestis and Demetriades  divided the financial structure into market-based and bank-based for the USA and Germany. He found that in short-run only USA, market-based financial system followed the economic growth.
Khan et al.,  examined the relationship between financial development and economic growth of Pakistan. The time-series data from 1971 to 2004 were used. The results showed that economic growth affects the financial development and also creates the demand for financial resources. It was also examined that financial depth and economic growth had directly associated with each other in case of Pakistan. In short-run, the economic growth affected the real investment level significantly. The stability between economic growth and financial development was confirmed by CUSUM and CUSUMQ test. The demand following hypothesis was acknowledged a number of studies such as Rehman and Cheema  for Pakistan, Acaravci et al.  for Turkey and Ang and McKibbin  for Malaysia. They concluded that financial sector development acts as the main engine of economic growth.
Another strand of finance-growth literature suggested no relationship between financial development and economic growth. For example, Lucas  argued that financial development is not included in the determinants of economic growth because as the economy reached at steady-state level access capital has no effect on the economic growth. Similar views put forward by Ali , and Kar et al. .
On empirical side, the majority of the studies have found the positive effects of financial development on economic growth. Herwartz and Walle  examined the finance-growth relationship in 73 high-income and low-income countries for the period of 1975 to 2011. Their results showed that in high-income economies, the effect of financial development is strong on economic growth as compare to the low-income economies. Likewise, they explored the link between financial development and economic growth by using four different measures of financial development. They found longrun relationship between various measures of financial development (Bond market development, stock market development, insurance sector development and stock market development) and economic growth. They found bi-directional causality between insurance sector improvement and economic growth, and stock market development and economic growth, while unidirectional causality between banking sector development and economic growth. Some studies have shown negative relationship between finance and economic growth. For example, Ductor and Grechyna  found no positive link between financial development and economic growth in 101 developing and developed countries. Similarly, Narayan and Narayan  examined the finance-growth link in 65 developing countries and found weak relationship between financial development and economic growth.
Recent finance-growth literature raises an issue of non-linearity or threshold level. This argument advocates that the financial development is beneficial for the economy only up to a certain level, after that this will contribute negatively. Among others, they examined the link of financial development and economic growth in 87 developing and developed countries. They concluded that finance is good for economic growth only up to a limit, and more finance may not be good for the economy. In the same strand of literature, Rousseau and Wachtel  and Arcand et al.  concluded that finance has negatively affected economic growth when the level of financial development reached at the threshold. Samargandi et al.  also examined the financegrowth threshold analysis by taking 52 middle-income economies for the period of 1980-2008. The results showed that in the long-run, the relationship between financial development and economic growth seemed to be inverted U-shaped. To the extent of this line, Deidda and Fattouh  examined the finance-growth threshold in a panel of highincome and low-income countries. They found that in high-income countries, finance-growth relationship was more significant than that of low-income countries.
Demetriades et al.,  studied non-monotonic link of financial development and economic growth by using the heterogeneous panel of countries. The results showed that bank regulations and banking supervision exerted the significant effect on the finance-growth relationship. Furthermore, they observed insignificant effect of financial sector development on economic growth in the long-run. Naveed and Mahmood  investigated the impact of domestic financial liberalization on economic growth in Pakistan. The results showed that internal financial liberalization impacted economic growth positively in the long-run, while the relationship between the two variables turned to being negative in the short-run. Khan et al.  investigated the link between financial development and economic growth in Pakistan by using capital to private sector as a share of GDP and M2 relative to GDP as a proxy of financial development and real GDP per capita and private investment expenditure as proxy of economic growth. The results supported the demand following hypothesis when private sector as share of GDP and real GDP per capita were used as a proxy of financial development and economic growth respectively. They found support for the feedback hypothesis when they considered M2 and private investment expenditure as proxy variables of financial development and economic growth.
The literature review concludes that limited studies have been conducted that focus on the finance-growth nexus in the context of Pakistan. Previous studies explored the finance-growth relationship based on linear specifications and only found the short-run and longrun relationship between financial development and economic growth. Only few studies have been conducted with non-linear models but not determine the threshold level of financial development for Pakistan. The nature of economic variables is non-linear in nature, and their interpretation is not in stable relationship. Similarly, it has been showed that using linear models to interpret non-linear relationship may lead to poor results. Since, the financial sector of Pakistan adopted various reforms, the economic growth not respond same in different regimes. Therefore, this study will empirically examine the non-linear relationship between financial development and economic growth in case of Pakistan by using threshold approach.
The theoretical framework of this study stems from endogenous growth theory. The empirical studies revealed that financial development effects economic growth through efficient capital allocation. Our modeling strategy is based on the endogenous growth model by Lucas , Romer  and Pagano . We specify our model by following the Naveed and Mahmood  and Ibrahim and Alagidede . Following aggregate production function representing the constant-return scale:
Where, Yt is real GDP at time t, At is total factor of productivity (TFP) at time t, Kt is the real domestic capital stock at time t, Lt is the number of employed labor at time t, α and β are the production elasticity’s with respect to capital stock and labor respectively, while εt is error term. I log linear form equation can be written as:
Assume that total factor of productivity is determined by the following factors:
Where FDt is the financial system development at time t, HCt is the human capital at time t, INFt is the inflation at time t and GCt/Yt is the government expenditure relative to GDP at time t.
By substituting equation 3 into equation 2, the following equation is derived:
To examine empirically the strength of relationship between financial development and economic growth in Pakistan, the endogenous growth model mentioned above is extended up to following model. First, based on the empirical model the influential work of King and Levine  and Levine and Zervos  who proposed the following linear growth equation to examine the relationship between financial development and economic growth:
Yt is the real GDP per capita at time t, FDt is the financial system development at time t and Xt is vector of control variables (inflation, government consumption as proportion of GDP and capital formation as proportion of GDP) at time t. In this model, we examine the non-linear relationship between financial system development and economic growth. To this end, we determine the threshold level of financial system development at which the financial development contribute positively to economic growth. In non-linear relationship the response of economic growth is changed in different regimes. The non-linear model based on threshold regression is as following form:
The FDt is the threshold variables and λ1 and λ2 are the thresholds which divide the equation into three regimes with coefficients β1, β2, and β3, below threshold, in between and above threshold respectively.
In present study we use a time-series data of Pakistan for the period of 1972 to 2017. The annual data sourced from the World Development Indicators (WDI) of the World Bank, Economic survey of Pakistan 2017 and Hand book of statistics by State Bank of Pakistan (SBP). In the vast literature of finance-growth nexus there are various measures of financial development used like i) Domestic credit to private sector (% of GDP), ii) Liquid liabilities (M3) to GDP, iii) stock market capitalization to GDP and; iv) total assets in the saving banks to GDP. According to King and Levine , Beck and Demirguc-Kunt  and Khan , we use the first and common measure domestic credit to private sector relative to GDP. The domestic credit to private sector expresses the main financial sector activity and is the key characteristic of financial development.
The real GDP based on 2005-2006 constant prices is used as proxy of economic growth. And based on the neoclassical growth theory our control variables are includes: i) government expenditures expressed as percentage of GDP used to measure the size of the government. ii) Inflation which is measured by using annual percentage change in the consumer price index to measure the macroeconomic stability (instability). Inflation is expected to negatively impact on economic growth. Iii) Capital stock is used to measure the investment level by utilizing the information on gross fixed capital formation. This is expected to positive impact on growth. Capital stock series calculated by using following formula:
Table 1 shows the descriptive statistics of the interested variables. The estimated average GDP growth of Pakistan is 15.26% over the period 1972 to 2017. The average domestic credit to private sector is 23.50% (Figure 1). The value of slandered deviation is low as compared to mean values which indicate that the variables have less volatility then average. The jarque-bera values show the abnormality in data, data is not normally distributed. So, it suggests linear regression is not suitable for this data.
Table 1: Descriptive statistics.
The empirical literature showed the linear relationship between financial development and economic growth. However, the recent finance-growth literature overlooks the possibility of non-linear relationship and found that economic growth react differently at different level of financial development. The most of the existing studies follow the simple threshold techniques by adding square term in growth equation. In the present study, we are using Hansen [46,47] threshold approach for sample splitting. This threshold approach controls for the asymptotic theory that allow the threshold estimation, the level of significance and the confidence interval. Following threshold model presented by Hansen  to use two-stage least square method:
Where, qi is the threshold variable which is used to divide sample into different regimes; yi is the dependent variable; xi is the vector of explanatory variables and ei is the error term.
Firstly, sum of square error (SSE) is to be computed for a given threshold. Secondly, by minimizing the SSE estimate the .
To determine the existence of threshold effect and test the null hypothesis an F test is used as followed:
The threshold effect is existed if the null hypothesis is rejected. Hansen (1999, 2000) also suggested a bootstrap method to test the significance of threshold effect.
Additionally, the best way to form confidence interval for γ is to form ‘no-rejection region’ by using the likelihood ratio statistics for tests on γ. So, to test the hypothesis as follows:
The test statistics are calculated as follows:
Table 2 shows the relationship between financial development and economic growth through threshold regression. The value of threshold variable (domestic credit to private sector) is 3.290265 (Table 3). At this point the GDP growth becomes almost equal to zero or point of equilibrium. In the both regimes the relationship between financial development and economic growth is negative with coefficients of -0.58 and -7.18 respectively at 95% confidence interval. This study finds the finance-growth nexus in the case of Pakistan experiences threshold effects which are stimulating the wide-spread belief in finance and economics filed. Specifically, the level of domestic credit to private sector corresponding to 3.29% of the GDP and exceeding this level appears to distract capitals away from productive activities. The present Pakistan financial system does not seems to satisfy the “well-functioning” condition essential to promoting economic growth. The Pakistan financial system currently damaging the economy. This suggested negative relationship is statistically insignificant. In the dataset only 9 observations out of 46 (or 20%) are exceeds this threshold level of domestic credit to private sector.
|LDCPS < 3.290265 -- 37 obs|
|3.290265 ≤ LDCPS -- 9 obs|
|R-squared||0.688456||Mean dependent variable||15.26864|
|Adjusted R-squared||0.610571||S.D. dependent variable||0.661277|
|S.E. of regression||0.412665||Akaike info criterion||1.257301|
|Sum squared residual||6.130536||Schwarz criterion||1.654831|
|Log likelihood||-18.9179||Hannan-Quinn criterion||1.406218|
Table 2: Threshold regression.
|Sequential F-statistic determined thresholds:||1|
|0 vs. 1 *||5.051336||25.25668||18.23|
|1 vs. 2||1.656067||8.280334||19.91|
*Significant at the 0.05 level. **Bai-Perron (Econometric Journal, 2003) critical values.
Table 3: Threshold specification.
Our findings lend acceptance of financial instability hypothesis which was presented by Minsky. The continuing build-up of advances in the Pakistan’s government, business and household sectors obviously impends the economy and employment. Our findings are also coordinated with the empirical evidence of financial development non-monotonic relationship with economic growth [17,38,48].
In regime 1, the coefficient of inflation and capital are negative and coefficient govt. consumptions is positive. Besides all coefficients are statistically significant determinants of economic growth. On the other hand, in regime 2, all estimated coefficients are positive except govt. consumptions and all coefficients are statistically insignificant.
Our findings are similar with non-linear finance-growth relationship literature which argued that financial development is good for economic growth only up to a certain level, after that point finance become drag on the economy [38,49,50]. Aghion et al.  claimed that as countries grow wealthier the finance decline the growth. Cecchetti and Kharroubi  and Arcand et al.  found the negative effect of financial development on economic growth at the start, when private credit goes to 90% or 100% of GDP. These arguments are similar with the financial development “vanishing effect”.
The sample country and sample period is different from Alaabed and Masih , but the finding are consistent. In sum, the empirical findings suggest that the relationship between financial development and economic growth is non-linear. A threshold regression is estimated, which shows expansion in domestic credit to private sector negatively impacts GDP growth in both regimes. But in both regimes the relationship is found to be insignificant statistically.
In this study we do not find the reasons of non-linear negative relationship between financial development and economic growth. But followings reasons may the cause of such relationship between financial development and economic growth: first, the reason might be the consumption loan which are not used in productive activities and tend to block economic growth. Hung  argued that only investment loans are facilitate by the financial development, which enhance the productivity. Beck et al.  likewise found enterprises loan and consumption loans are fundamental elements in determining the link of financial development and economic growth. The financial development effects negatively to economic growth due to high house hold loans and insufficient loans for enterprises. They argued that financial developments can effects positively to economic growth if enterprise loans constraints improved and sufficient funds available for enterprises.
Second, the financial development effects negatively in countries which are close to productivity frontier or at the frontier. Aghion et al.  found that financial development of countries above a certain level should converge in growth rate. Third, the country’s financial sector might develop too big in reality as compare to the real economy. According to Philippon,  and Bolton et al.  too large financial system may excessively extracts information and through this way financial sector motivates too much fresh talent towards financial industry. Another finding in same line shows that the faster the country’s financial system grows, the slower the economy as a whole grows. Cecchetti and Kharroubi  also found that if the financial system accounted more than the 3.9% of total country’s employment,49 the extra financial development effects economic growth negatively [56-59].
Last but not least, the political instability also a cause of negative relationship between financial development and economic growth [60,61]. In new govt. era the running projects are stopped which is not a good sign for economy. So, the excessive financial system facilities are not helpful for economic growth in the instable environment.
The study showed innovative suggestion on the nonlinear financegrowth relationship of Pakistan over the period from 1972 to 2017. The major contribution of this study was examined the nonlinear relationship between finance and growth by applying threshold model which was proposed by Hansen. The empirical results of this study showed the financial development threshold level of finance-growth nexus. Financial development above this threshold level, will effects economic growth negatively. On the other side, below the threshold level, financial development also effects negatively but with less magnitude.
The findings showed that too much financial development is not all times good for economic growth after a certain point. The effectiveness of the financial sector for country’s economy is depended on the optimal level of financial development and efficient channels for productivity. With respect to Pakistan’s policy suggestions, policy makers should emphasis more on the intermediating function of financial development rather than its size. To fostering the economic growth policy makers needed measures for strengthen the quality and moderate finance rather than only promoting more finance. Besides, in particular, situation if the finance has negative effects on economic growth, then other growth enhancing strategies needed to maintain the long-term growth. Although financial development is one of the powerful determinants has been identified for economic growth.
In this study, we only use the banking development indicator (domestic credit to private sector % of GDP). In channeling funds, equity markets also play a vital role, and firms mostly depended on the equity finance. So, it's important aspect, which will explore that stock market development also has non-linear relationship with economic growth. The negative effect of financial development on economic growth is transitory or permanent. How much time this effect can persist? The followings important aspects of finance-growth nexus are not yet examined and leave for the future research.
1For instance, Schumpeter (1912), Robinson (1960), Goldsmith (1969), Greenwood and Jovanovic (1990), Bencivenga and Smith (1991), Roubini and Sala-i-Martin (1992), King and Levine (1993), Green wood and Smith (1997), Levine (2005), among others.
- Schumpter JA (1912) The theory of economic development. Harvard University Press, Cambridge, MA.
- Schumpeter JA (1934) The theory of economic development: An inquiry into profits, capital, credit, interest, and the business cycle. Transaction publishers.
- McKinnon RI (1973) Money and capital in economic development. Brookings Institution Press.
- Shaw ES (1973) Financial deepening in economic development. Oxford University Press, New York.
- Al-Yousif YK (2002) Financial development and economic growth: another look at the evidence from developing countries. Rev Financ Econ 11: 131-150.
- King RG, Levine R (1993) Finance and growth: Schumpeter might be right. Quart J Econ 108: 717-737.
- Beck T, Demirgüç-Kunt A, Levine R (2000) A new database on the structure and development of the financial sector. World Bank Econ Rev 14: 597-605.
- Levine R, Loayza N, Beck T (2000) Financial Intermediation and Growth: Causality and Causes. J Monetary Econ 46: 31-77.
- Masten AB, Coricelli F, Masten I (2008) Non-linear growth effects of financial development: Does financial integration matter? J Int Money Financ 27: 295-313.
- Robinson J (1952) The Generalization of the General Theory, in The Rate of Interest and Other Essays (MacMillan, London).
- Demetriades PO, Hussein KA (1996) Does financial development cause economic growth? Time-series evidence from 16 countries. J Dev Econ 51: 387-411.
- Ireland PN (1994) Money and growth: an alternative approach. Am Econ Rev, pp: 47-65.
- Luintel KB, Khan M (1999) A quantitative reassessment of the finance-growth nexus: evidence from a multivariate VAR. J Dev Econ 60: 381-405.
- Khan MA (2007) Foreign direct investment and economic growth: the role of domestic financial sector. Pakistan Inst Dev Econ.
- Khan MA, Khan SA (2011) Foreign direct investment and economic growth in Pakistan: A sectoral analysis. Working Papers & Research Reports, 2011.
- Naveed S, Mahmood Z (2017) Impact of domestic financial liberalization on economic growth in Pakistan. J Econ Policy Reform, pp: 1-19.
- Deidda L, Fattouh B (2002) Non-linearity between finance and growth. Econ Lett 74: 339-345.
- Rioja F, Valev N (2004) Does one size fit all?: A reexamination of the finance and growth relationship. J Dev Econ 74: 429-447.
- Demetriades PO, Law SH (2006) Openness, institutions and financial development. WEF Working Papers 0012.
- Ibrahim M, Alagidede P (2018) Nonlinearities in financial development-economic growth nexus: Evidence from sub-Saharan Africa. Res Int Bus Financ 46: 95-104.
- Goldsmith RW (1969) Financial structure and developmentas a subject for International comparative study. Comp Stud Econ Growth Struct, pp: 114-123.
- Patrick HT (1966) Financial development and economic growth in underdeveloped countries. Econ Dev Cult Change 14: 174-189.
- Levine R (1997) Financial development and economic growth: views and agenda. J Econ Literature 35: 688-726.
- De Gregorio J, Guidotti PE (1995) Financial development and economic growth. World Dev 23: 433-448.
- Kuznets S (1955) Economic growth and income inequality. Am Econ Rev 45: 1-28.
- Arestis P, Demetriades P (1999) Finance and growth: institutional considerations, financial policies, and causality. Zagreb Int Rev Econ Bus 2: 37-62.
- Khan MA, Qayyum A, Sheikh SA, Siddique O (2005) Financial development and economic growth: The case of Pakistan. Pakistan Dev Rev, pp: 819-837.
- Rehman A, Cheema A (2013) Financial development and real sector growth in Pakistan. Interdiscipl J Contemp Res Bus 5: 618-636.
- Acaravci SK, Ozturk I, Acaravci A (2009) Financial development and economic growth: Literature survey and empirical evidence from sub-Saharan African countries. S Afr J Econ Manage Sci 12: 11-27.
- Ang JB, McKibbin WJ (2007) Financial liberalization, financial sector development and growth: evidence from Malaysia. J Dev Econ 84: 215-233.
- Lucas R (1988) On the mechanics of economic development. J Monetary Econ 22: 3-42.
- Ali R (2014) The role of bank-based finance in economic growth of Pakistan. Middle E J Sci Res 22: 82-90.
- Kar M, Nazlıoğlu Ş, Ağır H (2011) Financial development and economic growth nexus in the MENA countries: Bootstrap panel granger causality analysis. Econ Model 28: 685-693.
- Herwartz H, Walle YM (2014) Determinants of the link between financial and economic development: Evidence from a functional coefficient model. Econ Model 37: 417-427.
- Ductor L, Grechyna D (2015) Financial development, real sector, and economic growth. Int Rev Econ Financ 37: 393-405.
- Narayan PK, Narayan S (2013) The short-run relationship between the financial system and economic growth: New evidence from regional panels. Int Rev Financ Anal 29: 70-78.
- Rousseau PL, Wachtel P (2002) Inflation thresholds and the finance–growth nexus. J Int Money Financ 21: 777-793.
- Arcand JL, Berkes E, Panizza U (2012) Too much finance?. IMF Working Paper 12/161, International Monetary Fund, Washington.
- Samargandi N, Fidrmuc J, Ghosh S (2014) Financial development and economic growth in an oil-rich economy: The case of Saudi Arabia. Econ Model 43: 267-278.
- Demetriades PO, Rousseau PL, Rewilak J (2017) Finance, growth and fragility. University of Leicester Discussion Paper in Economics.
- Khan A, Ahmed M, Bibi S (2018) Financial development and economic growth nexus for Pakistan: a revisit using maximum entropy bootstrap approach. Empirical Econ, pp: 1-13.
- Romer PM (1986) Increasing returns and long-run growth. J Polit Econ 94: 1002-1037.
- Pagano M (1993) Financial markets and growth: an overview. Eur Econ Rev 37: 613-622.
- Levine R, Zervos S (1998) Stock markets, banks, and economic growth. Am Econ Rev 88: 537-558.
- Beck T, Demirguc-Kunt A (2006) Small and medium-size enterprises: Access to finance as a growth constraint. J Bank Financ 30: 2931-2943.
- Hansen BE (1999) Threshold effects in non-dynamic panels: Estimation, testing, and inference. J Econ 93: 345-368.
- Hansen BE (2000) Sample splitting and threshold estimation. Econometrica 68: 575-603.
- Beck T, Degryse H, Kneer C (2014) Is more finance better? Disentangling intermediation and size effects of financial systems. J Financ Stabil 10: 50-64.
- Cecchetti SG, Kharroubi E (2012) Reassessing the impact of finance on growth. BIS Working Paper No. 381.
- Shen CH, Lee CC (2006) Same financial development yet different economic growth: why? J Money, Credit Banking, pp: 1907-1944.
- Aghion P, Angeletos M, Banerjee A, Manova K (2004) Volatility and Growth: The Role of Financial Development. Harvard University.
- Alaabed A, Masih M (2016) Finance-growth nexus: Insights from an application of threshold regression model to Malaysia's dual financial system. Borsa Istanbul Rev 16: 63-71.
- Hung FS (2009) Explaining the nonlinear effects of financial development on economic growth. J Econ 97: 41-65.
- Philippon T (2010) Financiers versus engineers: Should the financial sector be taxed or subsidized? Am Econ J: Macroecon 2: 158-182.
- Bolton P, Santos T, Scheinkman JA (2016) Cream‐skimming in financial markets. J Financ 71: 709-736.
- Wadud MA (2009) Financial development and economic growth: a cointegration and error-correction modeling approach for south Asian countries. Econ Bull 29: 1670-1677.
- Akinci GY, Akinci M, Yilmaz Ö (2014) Financial development-economic growth nexus: A panel data analysis upon OECD countries. Hitotsub J Econ, pp: 33-50.
- Atif RM, Jadoon A, Zaman K, Ismail A, Seemab R (2010) Trade liberalization, financial development and economic growth: Evidence from Pakistan (1980–2009). J Int Acad Res 10: 30-37.
- Jalil A, Ma Y (2008) Financial development and economic growth: time series evidence from Pakistan and China. J Econ Cooperation 29: 29-68.
- Levine R (1999) Bank-based and market-based financial systems: Cross-country comparisons. World Bank Publications.
- Ray S (2013) Does financial development promote economic growth in India? Int J Econ Practices Theories 3: 140-151.
Citation: Tariq R, Khan MA (2019) Nonlinearities in Financial Development and Economic Growth Nexus: Evidence from Pakistan. Bus Eco J 10: 385. DOI: 10.4172/2151-6219.1000385
Copyright: © 2019 Tariq R, et al. This is an open-access article distributed under the terms of the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited.
Select your language of interest to view the total content in your interested language
Share This Article
- Total views: 198
- [From(publication date): 0-0 - May 23, 2019]
- Breakdown by view type
- HTML page views: 171
- PDF downloads: 27