Qual Quant (2014) 48:3221–3241
Multivariate-based Granger causality between ﬁnancial
deepening and poverty: the case of Pakistan
Ijaz Ur Rehman · Muhammad Shahbaz
Published online: 16 November 2013
© Springer Science+Business Media Dordrecht 2013
Abstract This paper deals with the empirical investigation of causal relationship between
ﬁnancial deepening, economic growth and poverty reduction using quarter frequency data in
case of Pakistan over the period of 1972–2011. We applied the autoregressive distributed lag
model bounds testing approach by incorporating structural breaks stemming in the series. The
order of integration of the variables is examined by applying structural break unit root test.
Our empirical exercise indicated that the long run relationship between ﬁnancial deepening,
economic growth and poverty reduction exists in case of Pakistan. The causality analysis
implied that causality results are sensitive with the use of proxy for poverty reduction.
Keywords Financial deepening · Economic growth · Poverty
Financial development plays its vital role by stimulating economic activities in an economy.
Sound ﬁnancial system generates funds through savings mobilization as well as distrib-
ute funds in productive ventures, monitors the risk management, adds in economic growth
by stimulating the accumulation of capital, motivating technological advancements as well
as increase efﬁciency investment activities (Luintel and Khan 1999; Kirkpatrick 2000).
This implies that ﬁnancial development Granger causes economic growth i.e. supply-side
hypothesis. Economic growth contributes to ﬁnancial development by raising the demand
for ﬁnancial services. This shows that causality is running from economic growth to ﬁnancial
I. U. Rehman (
Department of Finance and Banking, Faculty of Business and Accountancy,
University of Malaya, Kuala Lumpur, Malaysia
Department of Management Sciences, COMSATS Institute of Information Technology,