Financial Inclusion, Trade Openness, and Growth Volatility: Empirical Insights

Abstract

Persistent and unpredictable growth volatility remains a key issue in Pakistan, constraining sustainable economic performance and weakening policy effectiveness. Hence, financial inclusion and trade openness emerge as pivotal determinants of macroeconomic performance. Although growing literature examines the effects of financial inclusion and trade openness on the level of economic growth, their combined impact on growth volatility within a unified framework remains inadequately explored empirically. The aim of the study is to examine the joint effect of financial inclusion and trade openness on growth volatility in Pakistan. To achieve the objective, the study uses data from 2004-2023 and employs the Autoregressive Distributed Lag (ARDL) bounds testing approach. The empirical results indicate that financial inclusion and trade openness reduce growth volatility. The findings offer important policy implications. Strengthening financial inclusion should be a central component of Pakistan's macroeconomic stabilization strategies. Moreover, trade policies should focus on export diversification and shock-absorbing mechanisms to minimize short-term volatility while leveraging long-term gains. Enhancing institutional quality and financial infrastructure can further reinforce economic resilience and reduce growth fluctuations.