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Does financial development lead or lag economic growth ? Malaysian evidence

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  • Nazlan, Wan Syafiq
  • Masih, Mansur

Abstract

The relationship between the financial development and economic growth is a never ending debate, especially in the literature of financial economics. Even though some papers have provided empirical and theoretical results, the dynamism of finance and economic growth which changes over time does not lead us to a conclusive answer. Here we are trying to shed some light on the causality that exists between these two indicators, which is also our issue. Does the financial development lead economic growth or the other way around? Using the standard times series techniques, we hope to clarify this issue further. This paper is focusing on Malaysia, a gap that we try to fill in since there are not many papers discussing it particularly in the Malaysian context. The results that we have found is that economic growth and financial development are theoretically related as evidenced in their being cointegrated and that economic growth leads (rather than lags) the financial development. The implication of this is that in the Malaysian context, further attention should be given to raising economic growth in order to enhance financial development.

Suggested Citation

  • Nazlan, Wan Syafiq & Masih, Mansur, 2017. "Does financial development lead or lag economic growth ? Malaysian evidence," MPRA Paper 110348, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:110348
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    References listed on IDEAS

    as
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    7. Mansur Masih & Ali Al-Elg & Haider Madani, 2009. "Causality between financial development and economic growth: an application of vector error correction and variance decomposition methods to Saudi Arabia," Applied Economics, Taylor & Francis Journals, vol. 41(13), pages 1691-1699.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Lead-lag; finance; growth; VECM; VDC; Malaysia;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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