DOES FINANCIAL DEVELOPMENT MATTER FOR ECONOMIC GROWTH IN MALAYSIA? AN ARDL BOUND TESTING APPROACH

By employing battery of time series techniques, the paper empirically examines the short- and long-run finance-growth nexus during the post-1997 financial crisis in Malaysia. Based on the ARDL [2, 1, 2, 1] model, the study documents a long-run equilibrium between economic growth, finance depth and inflation. Granger causality tests based on the VECM further reveals that there is a unidirectional causality running from finance to growth in Malaysia, thus supporting “the finance-growth led hypothesis” or “the supply-leading view”. Based on the VDCs and IRFs,the study discovers that the variations in the economic growth rely very much on its own innovations. To promote growth in the country, priority should be given for long run policies, i.e., the enhancement of existing financial institutions both in the banking sector and stock market and the preservation of low rate of inflation below two digits.