The relationship between financial development and economic growth is critical for making accurate projections of economic growth. However, most studies rely on a symmetric relationship, which can have misleading policy implications. This study aims to overcome this shortcoming by examining the effect of an asymmetric relationship on economic growth. To this end, the researchers use a nonlinear autoregressive distributed lags model to analyze the relationship between financial development and economic growth in Malaysia. To measure financial development, the authors use the banking sector and stock market development as indicators. The findings of the study suggest that there is an asymmetric relationship between these two variables, especially in the long run.
Financial development in Malaysia is positively related to the development of the stock market, which is one of the main drivers of economic growth. The stock market and its sub-components are the most significant determinants of economic growth in Malaysia. In addition, the government sukuk is excluded from this analysis.
Income inequality in Malaysia remains high, compared to other countries in East Asia. However, the gap between rich and poor has decreased over time. The government is focusing on improving the lives of the poorest 40 percent of its population. However, despite this progress, the country is still vulnerable to economic shocks. The high cost of living and mounting financial obligations continue to put a strain on this group.
The Malaysian economy has experienced a significant improvement in financial institutions. Its openness to investment and trade has been a crucial factor in increasing employment and income. Today, over 40% of the country’s jobs are associated with export activities. The country has experienced an upward trajectory since its independence in 1957, with an average growth rate of 5.4% per year since 2010. Malaysia is predicted to transition from an upper middle-income economy to a high-income one by 2024.
Malaysia’s financial sector is projected to contribute between eight and 12 percent of the country’s GDP by 2020. The country’s stock market has grown rapidly and is expected to make Malaysia’s economy even more prosperous. After 2008, however, the volume of sukuk issued fell relative to new stock issues.
In a recent study, Botev et al. revisited the causal relationship between financial development and economic growth using a broad measure of financial development that includes measures of financial depth and efficiency of the financial system. The study found that the causal relationship between financial development and economic growth was weak and that a direct relationship could not be established.
The relationship between economic growth and financial development is important for the development of Asia. It is predicted that the role of the financial sector in this region will shift from mobilizing savings to improving investment efficiency, which ultimately leads to higher economic growth.
