Finance-growth nexus: insights from an application of threshold regression model to Malaysia’s dual financial system

Alaa Alaaabed and Abul Masih

MPRA Paper from University Library of Munich, Germany

Abstract: The purpose of this paper is to test the growing converging views regarding the destabilizing and growthhalting impact of interest-based debt financial system. The views are as advocated by the followers of Keynes and Hyman Minsky and those of Islam. Islam discourages interest rate based debt financing as it considers that it is not conducive to productive activities and to human solidarity. Likewise, since the onset of the crisis of 2007/2008, calls by skeptics of mainstream capitalism has been renewed, to reconsider the dynamics of the prevailing financial system with emphasis on its untamed credit-creating capacity and link (or rather delink) to real sector transactions. The paper applies a threshold regression model to Malaysian data and finds that the relationship between growth and financial development is non-linear. A threshold is estimated, after which credit expansion negatively impacts GDP growth. While the post-threshold negative relationship is found to be statistically significant, the estimated positive relationship at lower levels of financial development is insignificant. The findings are hoped to provide insights to monetary authorities for better growth-promoting policy-making..

Keywords: Credit; Financialization; Growth; Threshold Regression Model; Islamic Perspective (search for similar items in EconPapers)
JEL-codes: C22 C58 E44 (search for similar items in EconPapers)
Date: 2014-06-20
New Economics Papers: this item is included in nep-fdg, nep-mac, nep-pke and nep-sea
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Journal Article: Finance-growth nexus: Insights from an application of threshold regression model to Malaysia's dual financial system (2016)
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