This paper investigates the effects of debts and budgetary deficit on real variables using structural Vector Error Correction Model (VECM) method with long-run restrictions. We compare our estimates of the impulse responses with those based on levels Vector Auto-Regressive (VAR) with standard recursive order restrictions. The test is conducted on the Malaysian data covering the period of 1962-2006. The empirical results do not support the existence of “Ricardian Equivalence” hypothesis. The effects of budgetary deficit and government spending have a significant influence on private consumption and private investment.
The focal aim of this study is to examine the validation of education-led economic growth hypothesis in Malaysia under the recovery period following the 2008 world economic crisis. Specifically, this study implemented the augmented Cobb-Douglas model in order to observe the dynamic relationship between selected variables including, industrial production index, gross fixed capital formation, employment, government spending on education and broad money supply. This study adopted the Vector Error Correction Model (VECM) in analysing the dynamic impact between variables and generally supports the education-led growth hypothesis in the short and long run. Specifically the study corroborates the bidirectional causality between education spending and economic growth, and vice versa, in the short run. The result also reveals that long-run equilibrium relationship exists between government expenditure in education and economic growth in Malaysia during post-crisis recovery regime. The education-led growth hypothesis can thus be inferred for the economy following crisis. The government should thus be advised that increasing education sector spending should increase post-crisis economic growth in both the short and long run. This is further strengthened by Granger causality test result which suggests unidirectional causality that runs from financial variable to economic growth. It is accordingly suggested that financial variable is a determinant of government spending on education in the aftermath of the economic crisis. Additionally, the study also supports the role of capital and employment on economic growth in the long term. By implication, the study suggests that financial planning as related to national education policies must be carefully and meticulously crafted, to ensure future success. This is linked to the investment in human capital which includes education expenditure at different levels that is essentially important to national long-term planning. The specific financial planning for human capital development is therefore very important to ensure the expenditure incurred contributes to sustainable economic development in Malaysia in the long term.
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.
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