Financial Globalization and Financial Sector Effectiveness: An Index Based Analysis of Pakistan

Abstract

This paper tried to assess the nature of relationship between
financial sector openness and financial sector deepening for
Pakistan. The study utilized data set of annual frequency on
financial sector openness index, institutional quality index,
trade openness and a set of control variables over a period
from 1995 to 2018. The application of econometric method of
Autoregressive Distributed Lag Model (ARDL) confirmed the
extensively debated long run association, and after having
established this, found the estimates (both short run and long
run). Results demonstrated that financial openness and
institutional quality improve the quality of financial sector
efficiency in Pakistan for short run; however, in the long run
financial openness did not lead financial sector development.
These findings indicate that policies promote financial sector
openness appear to help Pakistan to derive the benefits of
quality of financial sector efficiency. Our analysis suggests
that there are unavoidable risks associated with financial sector
openness. Therefore financial openness is not just an isolated
policy goal. Along with institutional quality sounds
macroeconomics framework is an essential prerequisite for
making sure that financial development is beneficial.