Economic Growth and Financial Development Nexus in Malaysia: Dynamic Simultaneous Equations Models

Abstract

This paper estimates the equilibrium and causality relationships among gross domestic product, energy consumption, financial development, foreign direct investment inflows, and gross fixed capital formation. Different econometrics tests like descriptive statistics, ARCH, KPSS unit root, Johansen and Juselius’s co-integration, VECM Granger causality, and ARDL equilibrium relationships have been employed in Malaysia over the (1971−2013) period. The correlation matrix results indicate a linear association among variables. The null hypotheses of Heteroscedasticity and non-stationary have been rejected implying the appropriate use of VECM and ARDL approach. The VECM Granger causality findings show a long-run bidirectional among the variables. The ARDL approach results demonstrate that energy consumption, financial development, foreign direct investment inflows, and gross fixed capital formation augment gross domestic product in long-run. However, the findings of this paper add essential implications to policy makers and scholars in fields of economic, energy, and finance.