Inflation, financial development, and economic growth: the case of Malaysia and Thailand
By employing battery of time-series techniques, the paper empirically examines the short- and long-run finance-growth nexus after the 1997 financial crisis in Malaysia and Thailand. Based on autoregressive distributed lag (ARDL) models, the study documents a long-run equilibrium between economic growth, finance depth, and inflation. Granger causality tests reveals that there are (a) a unidirectional causality running from finance to growth in Malaysia, thus supporting the "finance-growth-led hypothesis" or the "supply-leading view"; and (b) a bidirectional causality between financial development and economic growth in Thailand, which accords with the "feedback hypothesis" or "bidirectional causality view". Based on the variance decompositions (VDCs) and the impulse-response functions (IRFs), the study discovers that the variations in the economic growth rely very much on their innovations. To promot growth in these countries, long-run policies—e.g., the enhancement of existing financial institutions both in the banking sector and the stock market—should be given priority.
JEL classification: C32, O16
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