Does finance lead or lag growth? evidence from Malaysia

Finance has played a significant role in the process of economic growth. There have been many attempts to shed light on the direction of Granger-causality between finance and growth for helping the policy makers. But the issue of direction of Granger-causality has remained unresolved. This paper is an attempt to revisit that issue as to whether finance leads or lags growth in a developing economy. The standard time series techniques are applied for the analysis. Malaysia is taken as a case study. The findings tend to indicate that finance lags growth at least in the context of Malaysia during the period under review. This finding has a strong policy implication in that the Government has to take a pro-active role to enhance the growth of the economy in order to develop the financial sector.