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2014•Labuan Bulletin of International Business and Finance (LBIBF)Open access

THE DYNAMIC CAUSAL BETWEEN FINANCIAL DEVELOPMENT AND ECONOMIC GROWTH: EMPIRICAL EVIDENCE FROM MALAYSIA BASED ON VECTOR ERROR CORRECTION MODELING APPROACH

Rosilawati Amiruddin, Abu Hassan Shaari Mohd Nor, Ismadi Ismail

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Abstract

The purpose of this paper is to study the effectiveness of financial development on Malaysian economic growth by utilising quarterly data. In view of the priority given to dynamic relationship in conducting this study, the Vector Autoregressive (VAR) method which encompasses the Johansen-Juselius Multivariate cointegration, Vector Error Correction Model (VECM), Impulse Response Function (IRF) and Variance Decomposition (VDC), are used as empirical evidence. The result reveals a short term and long term dynamic relationship between financial development and economic growth. The importance of financial sector in influencing the economic activity is proven as a clear policy implication.

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What this paper is about

The purpose of this paper is to study the effectiveness of financial development on Malaysian economic growth by utilising quarterly data. In view of the priority given to dynamic relationship in conducting this study, the Vector Autoregressive (VAR) method which encompasses the Johansen-Juselius Multivariate cointegration, Vector Error Correction Model (VECM), Impulse Response Function (IRF) and Variance Decomposition (VDC), are used as empirical evidence. The result reveals a short term and long term dynamic relationship between financial development and economic growth. The importance of financial sector in influencing the economic activity is proven as a clear policy implication.

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Available abstract

The purpose of this paper is to study the effectiveness of financial development on Malaysian economic growth by utilising quarterly data. In view of the priority given to dynamic relationship in conducting this study, the Vector Autoregressive (VAR) method which encompasses the Johansen-Juselius Multivariate cointegration, Vector Error Correction Model (VECM), Impulse Response Function (IRF) and Variance Decomposition (VDC), are used as empirical evidence. The result reveals a short term and long term dynamic relationship between financial development and economic growth. The importance of financial sector in influencing the economic activity is proven as a clear policy implication.

Key concepts: Cointegration, Variance decomposition of forecast errors, Vector autoregression, Error correction model, Impulse response, Econometrics, Economics, Autoregressive model

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THE DYNAMIC CAUSAL BETWEEN FINANCIAL DEVELOPMENT AND ECONOMIC GROWTH: EMPIRICAL EVIDENCE FROM MALAYSIA BASED ON VECTOR ERROR CORRECTION MODELING APPROACH — Research Paper | ScholarLens