Munich Personal RePEc Archive

Does financial development lead or lag economic growth ? Malaysian evidence

Nazlan, Wan Syafiq and Masih, Mansur (2017): Does financial development lead or lag economic growth ? Malaysian evidence.

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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.

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