Evaluating the Impact of Financial Stability and Monetary Stability on Economic Growth: Evidence from an Emerging Economy

Abstract

Financial stability and monetary stability both make an essential contribution to sustainable industrial growth and well-established industrial sectors contribute to sustainable economic development. The fundamental objective of this study is to create an FSI index to quantify financial strain in Pakistan. While utilizing monthly data starting from 2004-11 to 2017-7 the Financial Stress Index has four indicators which include TED spread, yield spread, stock price volatility, and exchange rate volatility through principal component analysis (PCA). An ARDL co-integration model is used to investigate the long-term and short-term relationships between time series data. The primary takeaways from this research are that financial stability and industrial production are positively correlated, while inflation and industrial production are negatively correlated. This study fills a knowledge gap by analyzing the impact of financial and monetary stability on economic growth in Pakistan using the Financial Stress Index. Lastly, this study sheds light on the financial and monetary concerns of Pakistan.