Financial Innovation and Economic Growth: Evidence from Pakistan

Abstract

In any economy, GDP Growth is massively motivated by rapid innovation in
the financial system. Financial system plays an important role to promote
economic growth in any country. It also improves the financial operation in
Foreign Trade with other countries. So, the aim of the present study is to
investigate the impact of Financial Innovation on Economic Growth in case
of Pakistan. For this purpose, the study used different macroeconomic
variables including, GDP as dependent variable, and domestic credit to
private sector is used as proxy of financial innovation. Other control variables
include, Ratio of M1 to M2, Gross Capital Formation (GCF), Government
Spending (GE), Trade (TR), Labor Force (LF) and Inflation (INF). Annual
Time Series Data is collected of selected variables from 1980 to 2020. The
study analyses data by applying Ordinary Least Square (OLS) method. The
empirical results of OLS indicate that, Financial Innovation (FI), boost up
economic growth, this shows the positive impact on GDP, while other
variables including, M1M2, GCF, GE, TR and LF put positively significant
impact on GDP, while only INF has negative and insignificant impact on
GDP.