Does Financial Development Promote Industrial Production in Pakistan? Evidence from Combine Cointegration and Causality Approach

This study investigates the impact of financial development on industrial production over the period of 1972-2014 in case of Pakistan. We use Bayer and Hanck (2013) combine cointegration technique to predict the long run relationship between financial development, saving and industrial production. The results predict three cointegration vectors which confirm the existence of long run relationship between underlying variables. The empirical evidence shows positive impact of financial development and savings on industrial growth in long run as well as in short run. The result of VECM Granger causality confirms the bidirectional causality between financial development and industrial production in long run. The variance decomposition approach shows that financial development has majour contribution in explaining industrial production. The impulse response function also confirms the results of variance decomposition. This research opens the new insights for policy making.