In this study, the relationship between financial development and economic growth is examined in an Autoregressive Distributed Lag (ARDL) framework, for Pakistan, utilizing annual data over the period 1961–2005. The main empirical findings suggest that in the long and short run, financial development and investment exerted a positive impact on economic growth. The findings also suggest that in the long–run, real deposit rate is positively related to economic growth but exerted an insignificant impact; however, in the short–run, the relationship between real deposit rate and real output is significant. The long– and short–run responses of the real interest rate are very low as compared to financial development variable, implying that the availability of funds is more important than their cost. To achieve sustainable eco–nomic growth, the study suggests a further acceleration of liberalization process in Pakistan with confidence and strong commitment.
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