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Inflation, financial development, and economic growth: the case of Malaysia and Thailand

Author

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  • M. Shabri Abd. Majid

    (International Islamic University of Malaysia)

Abstract

By employing battery of time-series techniques, the paper empirically examines the short- and long-run finance-growth nexus after the 1997 financial crisis in Malaysia and Thailand. Based on autoregressive distributed lag (ARDL) models, the study documents a long-run equilibrium between economic growth, finance depth, and inflation. Granger causality tests reveals that there are (a) a unidirectional causality running from finance to growth in Malaysia, thus supporting the "finance-growth-led hypothesis" or the "supply-leading view"; and (b) a bidirectional causality between financial development and economic growth in Thailand, which accords with the "feedback hypothesis" or "bidirectional causality view". Based on the variance decompositions (VDCs) and the impulse-response functions (IRFs), the study discovers that the variations in the economic growth rely very much on their innovations. To promot growth in these countries, long-run policies—e.g., the enhancement of existing financial institutions both in the banking sector and the stock market—should be given priority.

Suggested Citation

  • M. Shabri Abd. Majid, 2007. "Inflation, financial development, and economic growth: the case of Malaysia and Thailand," Philippine Review of Economics, University of the Philippines School of Economics and Philippine Economic Society, vol. 44(1), pages 217-238, June.
    • Handle: RePEc:phs:prejrn:v:44:y:2007:i:1:p:217-238
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    File URL: http://pre.econ.upd.edu.ph/index.php/pre/article/view/224/639
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    Citations

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    Cited by:

    1. Bakri Abdul Karim & M. Shabri Abd. Majid, 2010. "Does trade matter for stock market integration?," Studies in Economics and Finance, Emerald Group Publishing Limited, vol. 27(1), pages 47-66, March.

    More about this item

    Keywords

    foreign-growth nexus; autoregressive distributed lag models; multivariate causality;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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