Exploring Financial Soundness and Economic Growth Dynamics in Pakistan

Abstract

This study delves into the crucial relationship between financial soundness and economic growth, recognizing the pivotal role of a robust financial system in fostering sustainable development. By assessing various macroeconomic indicators, including broad money supply, foreign debt, interest rates, price level changes, trade openness, world interest rates, and economic growth, we aim to uncover the intricate dynamics at play in Pakistan's economy. Employing cointegration and causality analysis tests, we examine the long-term relationships between financial soundness and economic growth in Pakistan. Our findings from Johansen cointegration tests reveal the existence of significant cointegration relationships, indicating a stable long-term association between key macroeconomic variables and financial soundness. Furthermore, through causality analysis, we uncover insightful patterns in the causal relationships between these variables. The results confirm the presence of feedback mechanisms, unidirectional relationships, and neutrality hypotheses, shedding light on the intricate interplay between financial indicators and economic growth. By elucidating these relationships, our study provides valuable insights for policymakers and stakeholders, highlighting the importance of maintaining financial stability for fostering sustainable economic growth in Pakistan. This research contributes to the broader understanding of the macroeconomic determinants of financial soundness and their implications for economic development strategies.