Impact of financial development, money, and public spending on Malaysian national income: An econometric study

Abstract

The objective of this paper is to estimate an econometric model for analyzing the impact of financial development, money, and public spending on Malaysian national income. Selection of variables is made in accordance with the literature on financial sector development and economic growth and the monetarist and Keynesian views on the relative effectiveness of monetary and fiscal policy. After determining the time series characteristics of the dataset, a vector error-correction model (VECM) is estimated. The results show an unambiguous support for the 'supply-leading' view of financial development, implying the importance of financial sector development in Malaysia. The findings provide some support for the McKinnon-Shaw repressionist proposition. But there is no noticeable support either for the monetary policy or for the fiscal policy effectiveness in case of Malaysia. © 2002 Elsevier Science Inc. All rights reserved.