Impact of Financial Liberalization on Economic Growth: A Case Study of Pakistan

We have tried to explore the link between financial liberalization index (FLI) and economic growth in Pakistan by using annual data for 1971- 2007. The Phillips Perron unit root test is utilized to verify the level of integration and Auto-Regressive Distributed Lag (ARDL) technique for obtaining long run and short run coefficients. The empirical finding indicates that FLI and economic growth are positively linked in the short run. On the other hand, FLI is statistically insignificant in the long run, while the impact of real interest rate (RIR) on economic growth is negative and significant. This means that one unit increase in the RIR causes GDP to decline by Rs. 1.03 million. Our investigation recommends that SBP and the GOP should pursue financial liberalization policies that are consistent with economic growth.