Non-linear Impacts of Financial Inclusion on Pakistan’s Inclusive Growth: A Regime-Switching Approach
https://doi.org/10.35536/lje.2024.v29.i1.a4
Keywords:
Inclusive Growth, , Financial Inclusion, Regime SwitchingAbstract
This study explores the connection between financial inclusion and inclusive growth, highlighting the pressing need for such growth in contemporary Pakistan alongside the ongoing efforts to enhance financial inclusion levels. Utilizing a time series dataset from 2004 to 2022, we investigate variables including the index of inclusive growth, the composite index of financial inclusion, FDI, budget deficit, remittances, and government effectiveness. The analysis employs the Markov regime-switching technique to address the non-linearity of the data. Findings indicate a non-linear relationship between inclusive growth and financial inclusion. Financial inclusion has a significant and positive effect on inclusive growth during low-growth periods but exhibits negative effects during high-growth periods.
Government effectiveness consistently demonstrates a positive impact across both high and low-growth phases, with a more pronounced effect during low-growth periods. Remittances negatively influence growth, while FDI and budget deficit show significant positive effects during low-growth periods. Key recommendations include enhancing rural financial access and digital literacy during low-growth phases, addressing structural and regulatory inefficiencies during high-growth periods, and integrating Islamic finance into national strategies. Strengthening governance and periodically reviewing policies to align with evolving economic conditions are also vital for achieving sustained and equitable development.
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