Nexus between Financial Development and Investment in Pakistan: A Vector Auto-regressive Model Approach

Abstract

This study has been conducted to analyze the impacts of Financial Development on Investment in Pakistan. The objectives of this study are to generate Financial Development Index for Pakistan and to analyze the impact of Financial Development on Investment along with key explanatory variables. The time period for this study is from 1975 to 2011. An index has been constructed for exact measurement of financial development by using five main indicators, and for calculation of financial development index weighted average method has been used. In our investment’s model VAR model has been for results because of different order of integration and no proves of cointegration in our data, we have also applied the causality test on our model. It has been observed by the causality test that during the period of our study financial development cause investment and investment causes financial development. By the help of impulse response function it has also been observed that the impulse of financial development has decreased the investment in Pakistan and it could be due to a fact that Pakistan is at early stage of financial development and the saved resources are not properly mobilized to investment.