What are the mechanisms linking financial development and economic growth in Malaysia?

Abstract

This paper estimates a six-equation model of financial development and economic growth for Malaysia to shed light on the mechanisms linking these two variables. The results indicate that financial development leads to higher output growth via promoting both private saving and private investment. The findings also provide some support for the hypothesis of endogenous financial development and growth models that finance leads to higher growth through improved efficiency of investment. There is evidence that repressionist financial policies, such as interest rate controls, high reserve requirements and directed credit programs, have contributed positively to financial development. However, other direct government interventions in the economy, such as resource allocation through the operation of a broad-based employee provident fund (EPF) scheme and various public investment programs, seem to have impacted negatively on economic development in Malaysia.