How does financial development impact trade openness? Evidence from export performance of Pakistan
Current Study examines the relationship between financial developments with export performance in Pakistan. This objective was attained by employing yearly time series method and statistics have been used from 1972 to 2014. This study develops financial development index by using principal component analysis. In addition to this, the effect of different ways of financial development has been analyzed, for instance market capitalization, domestic credit furnished by the financial sectors, credit to the private sectors, credit to the private sectors by banks and the ratio of money supply to GDP. Johansen and ARDL cointegration portrays a long-term link in all models. Since short-term relationships are concerned, error correction model has been put into service. The results assert that financial development indicators (FND, CFS, CPS, CPB, MKC and MNS) have an immense positive effects on export performance when it comes to short-run relationships. The result of FMOLS confirms that the introductory results are powerful. Stability analysis indicates that all the models are stable. Causality analysis validates that unidirectional causality is present from export to financial development in all the models. In the last section, a few policy recommendations and directions for the upcoming research are given.