Untangling Demand-Following and Supply-Leading Postulate with the Lens of Granger Causality

Abstract

Researcher experimentally examined the interconnectedness among economic prosperity (EG) plus financial prosperity (FD) using the ARDL and Granger methodologies on annual data spanning 24 years, from 1988 to 2012. We measure economic prosperity (EG) by looking at real economic prosperity (GDP), and we measure financial prosperity (FD) by looking at two things: the progress of the financing system plus advancement of the stock market. The present study shows that the variables are cointegrated. A signal-directional causal link exists between financial prosperity (FD) and economic prosperity (EG), wherein LGDP granger causes finance lending growth and financial market capitalization and share trading volume granger cause LGDP. In certain instances, a supply-leading relationship is established, whereas in others, a demand-following relationship is demonstrated. Policymakers should formulate policies to enhance microfinance facilities, thereby fostering investment in small and medium firms. Pakistan's economy would grow faster if the financial sector improved and streamlined its microfinance processes, corporate governance, and risk management.