Abstract :
There is a well-recognized debate that financial sector development constitutes an important mechanism for long run economic growth. Through effective mobilization of domestic savings for productive investment, it also plays a crucial role for alleviation of poverty especially for developing nations. This study examines the cointegration and causality between development of financial sector, indicators of economic growth and poverty reduction in Pakistan during the time period ranging over 1975 to 2010. In this regard, annual time series data of different support variables that is, labor force and investment along with target indicators were rendered in the model for the assessment of long run relationship. Moreover, properties of the data were properly diagnosed prior to application of cointegration and causality approaches. The cointegration test finds the existence of long run equilibrium relationship between financial sector development, economic growth and poverty reduction. The multivariate VECM (Vector Error Correction Method) causality test at the end confirms the presence of unidirectional causality from poverty reduction to economic growth, economic growth to finance development, financial development to poverty reduction and economic growth to poverty reduction. It also finds no causality between finance development and economic growth, and poverty reduction and finance development. Major findings can be summarized in a way that economic growth is the policy variable to accelerate financial sector development and both could be used as the policy variable to reduce poverty in the economy.
