ABSTRACT

This study empirically examines the dynamic relationship between the capital market, money market and economic growth of Pakistan based on annual time-series data covering the period from 1980 to 2023. Applying the Autoregressive Distributed Lag (ARDL) model, the study analyzes both short-run and long-run effects of these markets on real Gross Domestic Product (GDP), while controlling important macroeconomic variables including investment, trade openness, inflation, and interest rates.

The results show a significant long-run positive relationship between stock market development and economic growth, indicating that equity market plays a crucial role in mobilizing savings, enhancing capital allocation, and promoting sustainable development. The money market also shows a strong positive impact by providing liquidity and helping with effective monetary policy transmission. On the contrary, the long-run relationship between the bond market and economic growth is insignificant, indicating its underdevelopment and narrow depth within Pakistan’s financial system. Moreover, investment has a negative long-run relationship with GDP, which suggests capital allocation inefficiencies. Trade openness and inflation had mixed impacts, with interest rates having a negative effect on economic growth.

The study further identifies institutional and regulatory barriers limiting the functioning of the capital and money market through rigorous thematic content analysis of expert interviews on how robust financial markets can serve as driver of economic growth.