Financial Crises and Economic Growth in Pakistan: A Time Series Analysis

The purpose of this research is to investigate the effects of inflation, interest rate and increase in the amount of foreign debt on economic growth of Pakistan. To indicate main factors of crisis so that inflation rates, higher interest rate and increase in the amount of foreign debt can be controlled. The secondary data was used in this study. The data has been obtained for the years 1972 to 2010 from website of business recorder. E-views was employed for analysis. To examine correlation between macro economic variables and Gross Domestic Product (GDP) augmented dickey fuller test of unit root, Johansen’s co-integration test and Granger-causality tests were put in. This study concludes that only Interest rate and foreign debts are having co-integration, whereas inflation and GDP is having no co integration between themselves. Interest rate is an essential device available to Government to intervene in the financial system of the country. However, rising interest rates in the country depress stock returns and can result in higher cost of debt. It is also concluded that GDP has relationship between all macro economic variables used in this study except FD.