Cointegration and Causality between non-bank financial intermediaries and economic growth in Malaysia
The question whether financial development influences economic growth has been examined in a large number of studies over the past four decades. Theoretically, the positive effects of financial development on economic growth are credited primarily to the functions it plays in the mobilization and...
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| Format: | Conference or Workshop Item |
| Language: | English |
| Published: |
2010
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| Subjects: | |
| Online Access: | http://irep.iium.edu.my/22662/ http://irep.iium.edu.my/22662/1/Cointegration_and_Causality_between_non-bank_financial_intermediaries.pdf |
| Summary: | The question whether financial development influences economic growth has been examined in a large
number of studies over the past four decades. Theoretically, the positive effects of financial development
on economic growth are credited primarily to the functions it plays in the mobilization and allocation of
resources needed to undertake productive investment activities by various economic agents. Theoretical
literature argued that the increased availability of financial instruments and institutions greatly reduces
transaction and information costs in economy which in turn influences savings rate, investment decisions,
undertaking of technological innovations and hence the economic growth. A great deal of empirical works
has also tested the finance-growth hypothesis in a various settings using different indicators of financial
development in cross-country or time series studies. The tests found mixed results. They are; no causal
relationship, growth causes financial development, financial development causes growth, and
bidirectional relationship. However majority of the findings support that financial development plays the
leading role in influencing economic growth. Surprisingly; most of the existing finance-growth literature
uses either bank development or stock market development as proxy for financial development ignoring
the development of non-bank financial intermediaries (NBFIs) as one of the significant components of the
financial system development and its relationship with economic growth. In this paper we made an
attempt to fill in the gap by investigating the causal relationship between NBFIs and economic growth in
Malaysia for the period 1974-2004. By employing ARDL bounds testing approach to cointegration and
the Granger non causality test in a multivariate vector error correction mechanism (VECM), we found
that nonbank financial intermediaries and economic growth are cointegrated when economic growth is
treated as the dependent variable. The finding shows evidence of a long-run causality running from
nonbank financial intermediaries to economic growth, but not the vice versa. |
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