THE NEXUS BETWEEN FISCAL DEFICIT AND ECONOMIC GROWTH IN MALAYSIA
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Published:
Jun 30, 2020
Keywords:
fiscal deficit economic growth countercyclical business cycle
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Abstract
This study investigates the linkages between fiscal deficit and economic growth in Malaysia. Using data from 1980 to 2017, our results indicate: Firstly, there exists a long-run relationship between fiscal deficit and real GDP; secondly, on information flow, the fiscal deficit is found to precede real GDP. Further analysis of the impact of fiscal deficit on real GDP proves that the Keynesian Growth Theory is valid in Malaysia. Specifically, the fiscal deficit has a positive impact on Malaysia’s GDP. Moreover, the fiscal deficit is found to be growth-enhancing during the 1997-98 and 2008-09 economic crisis. Hence, it can be concluded that the fiscal deficit is imperative in helping the Malaysian economy restore itself after an economic crisis. As a policy suggestion, fiscal deficit results from the expansionary fiscal policy should be countercyclical to smoothen the business cycle and subsequently improve Malaysia's macroeconomic performance.
Keywords: fiscal deficit, economic growth, countercyclical, business cycle
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Nelson, M. A., & Singh, R. D. (1994). The deficit – growth connection: Some recent evidence from developing countries. Economic Development and Cultural Change, 43(1), 167-191.
Obben, J. (1998). The demand for money in Brunei. Asian Economic Journal, 12(2), 109-121.
Rana, E.A. & Wahid, A.N.M. (2017). Fiscal deficit and economic growth in Bangladesh: A time-series analysis. The American Economist, 62(1), 31-42.
Rana, E. A., & Wahid, A. N. (2017). Fiscal deficit and economic growth in Bangladesh: A time-series analysis. The American Economist, 62(1), 31–42.
Tan, E.C. (2006). Fiscal deficits, inflation and economic growth in a successful open developing economy. Review of Applied Economics, 2(1), 129-139.
Taylor, L., Proano, C.R., Carvalho, L.D. & Barbosa, N. (2012). Fiscal deficits, economic growth and government debt in the USA. Cambridge Journal of Economics, 36(11), 189-204.
Van, V.B. & Sudhipongpracha, T. (2015). Exploring government budget deficit and economic growth: Evidence from Vietnam’s economic miracle. Asian Affairs: An American Review, 42(3), 127-148.
Fatima, G., Ahmed, M., & Rehman, W. (2012). Consequential effects of budget deficit on the economic growth of Pakistan. International Journal of Business and Social Science, 3(7), 203-208.
Hallam, D. & Zanoli, R. (1993). Error-correction models and agricultural supply response. European Review of Agricultural Economics, 69(1), 27-49.
Johansen, S. (1988). Statistical analysis of cointegrating vector. Journal of Economic Dynamic and Control, 12(2-3), 231-254.
Kwiatkowski, D., Philips, P.C.B., Schmidt, P. & Shin, Y. (1992). Testing the null hypothesis of stationarity against the alternative of a unit root. Journal of Econometrics, 54(1-3), 159-178.
Martin, R. & Fardmanesh, M. (1990). Fiscal variables and growth: A cross-sectional analysis. Public Choice, 64(3), 239-251.
Majumder, A. (2007). Does public borrowing crowd-out private investment? Bangladesh evidence. Working Paper No. 0708. Bangladesh Bank.
Mohanty, R.K. (2018). Fiscal deficit and economic growth linkages in India: Impact of FRBM Act. In Khan, N.A. (ed), Challenges and Issues in Indian Fiscal Federalism, India Studies in Business and Economics (pp. 89-105). Springer, Singapore.
Nelson, M. A., & Singh, R. D. (1994). The deficit – growth connection: Some recent evidence from developing countries. Economic Development and Cultural Change, 43(1), 167-191.
Obben, J. (1998). The demand for money in Brunei. Asian Economic Journal, 12(2), 109-121.
Rana, E.A. & Wahid, A.N.M. (2017). Fiscal deficit and economic growth in Bangladesh: A time-series analysis. The American Economist, 62(1), 31-42.
Rana, E. A., & Wahid, A. N. (2017). Fiscal deficit and economic growth in Bangladesh: A time-series analysis. The American Economist, 62(1), 31–42.
Tan, E.C. (2006). Fiscal deficits, inflation and economic growth in a successful open developing economy. Review of Applied Economics, 2(1), 129-139.
Taylor, L., Proano, C.R., Carvalho, L.D. & Barbosa, N. (2012). Fiscal deficits, economic growth and government debt in the USA. Cambridge Journal of Economics, 36(11), 189-204.
Van, V.B. & Sudhipongpracha, T. (2015). Exploring government budget deficit and economic growth: Evidence from Vietnam’s economic miracle. Asian Affairs: An American Review, 42(3), 127-148.