THE DYNAMIC CAUSAL BETWEEN FINANCIAL DEVELOPMENT AND ECONOMIC GROWTH: EMPIRICAL EVIDENCE FROM MALAYSIA BASED ON VECTOR ERROR CORRECTION MODELING APPROACH

Abstract

The purpose of this paper is to study the effectiveness of financial development on Malaysian economic growth by utilising quarterly data. In view of the priority given to dynamic relationship in conducting this study, the Vector Autoregressive (VAR) method which encompasses the Johansen-Juselius Multivariate cointegration, Vector Error Correction Model (VECM), Impulse Response Function (IRF) and Variance Decomposition (VDC), are used as empirical evidence. The result reveals a short term and long term dynamic relationship between financial development and economic growth. The importance of financial sector in influencing the economic activity is proven as a clear policy implication.