Financial Liberalization, Financial Sector Development and Growth: Evidence from Malaysia

Abstract

The objective of this paper is to examine whether financial development leads to economic growth or vice versa in the small open economy of Malaysia. We argue that the results obtained from cross-country studies are not able to address this issue satisfactorily and highlight the importance of country specific studies. Using time series data from 1960 to 2001, we conduct co-integration and various causality tests to assess the finance-growth link by taking saving, investment, trade and real interest rate into account. Contrary to the conventional findings, our results support the view that output growth causes financial depth in the long-run.