Foreign capital inflows-growth nexus and role of domestic financial sector: an ARDL cointegration approach for Pakistan

Abstract

This study explores the roles of foreign capital inflows and domestic financial sector development on economic growth in the case of Pakistan. Using annual data series of World Bank and Economic Survey of Pakistan over the period of 1971-2008, ARDL bounds testing approach to cointegration and Error Correction Model (ECM) are employed for long run and short run relationships, respectively. Empirical evidence reveals that foreign capital inflows have positive effect on economic growth. Financial sector’s development and public investment stimulate economic growth. Human capital stock and inflation also contribute to economic growth positively. The present study suggests that Pakistan government should undertake financial reforms to improve the efficiency of the domestic financial sector which will ultimately increase the rate of economic growth in the country.