| Abstract: |
There is scantiness of empirical research on the specific relationship between
financial institutions, capital account liberalization and trade-openness but
there is no particular study in the case of Pakistan. This study investigates
the importance of financial institutions, net financial capital inflows and
trade-openness for financial sector’s development in a small developing
economy like Pakistan. Further, it also examines the hypothesis (Zingales and
Rajan, 2003), predicts combined influence of capital account liberalization
and trade openness on financial sector’s efficiency but insignificant. We
employed three approaches (Johansen Test, DOLS and ARDL bounds testing) for
the robustness of long run relationships among the variables utilizing the
annual data for the period 1971-2006. We found that, under the investigation
of three new alternative techniques, results are robust for long run
relationships in the case of Pakistan. Coefficient of net capital inflows is
having positive impact on financial development in the long run but
insignificant in short run. Trade openness is the main source of financial
sector’s development both in long run as well as in short run. On the other
hand, financial institutions and economic growth also help to improve the
development of financial markets in both the periods. Finally, rise in
inflation reduces the efficiency of financial markets through its detrimental
channels in the economy in short run as well in long run |