See discussions, stats, and author profiles for this publication at: https://www.researchgate.

net/publication/253329745

ASSESSING THE IMPACT OF EXPANSIONARY FISCAL POLICY ON MALAYSIA

ECONOMY: A CO-INTEGRATION ANALYSIS

Conference Paper · July 2012

CITATIONS READS

0 3,240

2 authors:

Hussain Ali Bekhet Nor Salwati bt Othman

Universiti Tenaga Nasional (UNITEN) Universiti Tenaga Nasional (UNITEN)
109 PUBLICATIONS   823 CITATIONS    11 PUBLICATIONS   114 CITATIONS   

SEE PROFILE SEE PROFILE

Some of the authors of this publication are also working on these related projects:

Dear All: Curently, I am working on paper entitled Investagating source change of economic dvelopment in Malysia. It could be in the process
within 2-3 weeks. View project

Marketing strategy audit on organizational performance through innovation capabilities View project

All content following this page was uploaded by Nor Salwati bt Othman on 15 October 2014.

The user has requested enhancement of the downloaded file.

 ASSESSING THE IMPACT OF EXPANSIONARY FISCAL POLICY ON MALAYSIA
ECONOMY: A CO-INTEGRATION ANALYSIS

Hussain Ali Bekhet

Graduate Business School, College of Graduate Studies
Universiti Tenaga Nasional (UNITEN), Malaysia
profhussain@uniten.edu.my, drbekhet1953@hotmail.com

Nor Salwati bt Othman

Department of Finance & Economics
College of Business and Accounting (COBA)
Universiti Tenaga Nasional (UNITEN), Malaysia
norsalwati@uniten.edu.my, norsalwati@yahoo.com

ABSTRACT

Expansionary fiscal policy can have either positive or negative impact to GDP growth. Some researches show that
expansionary fiscal policy can play an effective role in improving the economy, whereas others found that
expansionary fiscal policy increases national debt. Due to its spectacular impact, the current paper examines the
causal relationship among government expenditure (G), external debt (ED), GDP (G), export (X) and FDI (F).
Utilising Malaysia’s time series data for 1970-2011 period, this empirical framework applies co-integration test to
detect the long run relationship and granger causality to evaluate the direction of causality. The results show the
existence of long run relationship among variables and unidirectional causality running from government
expenditure and GDP growth to external debt. However, the results show that there is no causal relationship
between government expenditures and GDP growth. The findings have important policy implications. The results
indicate that expansionary fiscal policy in Malaysia could increase the burden of the country rather than directly
stimulating the economic growth.

Keywords: Expansionary fiscal policy, debt, co-integration, Export, FDI, Malaysia

INTRODUCTION

The issue on how to stabilise the economy and how to achieve sustainability growth through the
implementation of fiscal tools has attracted many economies and policy makers around the
globe. Some countries are experiencing fiscal surplus while some countries are experiencing
fiscal deficit. Fiscal surplus arises when these countries’ government revenue exceeds their
government expenditure, while fiscal deficit happens when their government expenditure
exceeds government revenue. Malaysia and some of developing countries like Nigeria,

1
Argentina, Bahrain, Barbados, Bhutan, Mexico, Korea, Indonesia and Kenya (Adam and Bevan,
2005) usually experience fiscal deficit.

Theoretically, government expenditure was found as an important tool to boost economic growth
by injection of aggregate demand, government capital formation and incentive. On the other
hand, this injection would slowdown the economic activities when expansionary fiscal policies
are forced to increase internal and external debt in order to finance its expenditure. In Malaysia,
the GDP and government expenditures shows the increasing trend from 1980-2010 (see figure
1). The GDP growth by 6% and government expenditure growth by 5.5%. While, the debt GDP
ratio in 2010 was reported 53.1% which was over 50%. In conjunction to the above scenario, the
current paper is an analysis of the pro and cons of expansionary fiscal policy to Malaysia’s
economy for the 1970 – 2011 period. Then, the aim of the current paper is to assess the impact of
expansionary fiscal policy to Malaysia’s economy, and does expansionary fiscal policy lead to
positive impact of the economy growth or may be worsen the economy performance which is
lead to increase debt?

FIGURE 1: MALAYSIA GDP AND GOVERNMENT EXPENDITURES (IN RM MILLIONS)

700000
y = 95003e0.0603x
600000 R² = 0.984

500000
GDP in RM million
400000

300000
Government
200000 y = 12932e0.0554x expenditures in RM
R² = 0.9701 million
100000

Source: World Bank

Based on this background, this paper aims to determine the causal relationship among
expansionary fiscal policy, GDP and debt by using the co-integration method. Specifically, this
paper attempts to explore the following objectives:
1. To investigate how GDP and debt respond to an increase the government expenditure.
2. To assess other important contributors to the changes in GDP growth.

2
 3. To investigate/identify causal relationship among GDP, debt, government expenditure,
export and inflow foreign direct investment.

The findings of this paper can be benefited the academician and researchers who are currently
looking for more empirical evidence on the contribution of fiscal policy to macroeconomics.
Moreover, the results have important policy implication and have proven the relevancy of fiscal
policy to the Malaysia Economy.

The rest of the paper is organised as follows: Section 2 presents the background of fiscal policy
in Malaysia. Section 3 reviews the past literature. Section 4 defines the data and variables used in
this paper. Section 5 describes the methodology of the study. Section 6 analyses the results
whereas section 7 discusses the policy implications and conclusions.

BACKGROUND OF FISCAL POLICY IN MALAYSIA

Since the main focus of this paper is to investigate the impact of expansionary fiscal policy on
economic growth and other macroeconomics tools, it is essential to describe the background of
fiscal policy in Malaysia. There are varieties of policies and tools of government intervention
and fiscal policy is one of them. Fiscal policy is a change in federal taxes and purchases that are
intended to achieve macroeconomics policy objectives (Hubbard and O’Brien, 2010). These
objectives are economic growth and development, full-employment, price stability and poverty
reduction (Usman, et al., 2011). Federal government expenditure in Malaysia was allocated for 2
major purposes namely, operation purposes and development purposes. The rationale for
allocating the budget for operation purposes is to upgrade and improve productivity as well as to
impede long term economic growth potential. The operating expenditure was increased from RM
157,067 million in 2009 to RM 152,158 million in 2010 (refer to table 1). The largest component
of operating expenditure is emoluments, followed by subsidies and supplies and services (in
2010). The factor contributing to higher allocation for emoluments is to accommodate the
improved scheme of service for the police as well as the amendment to the salary scheme of
medical and dental lecturer in public higher education institutions (Economic Report, Ministry of
Finance 2010-2011). Subsidies is second top operation expenditure. Its trend was increased over
the years starting from 2006 onwards and the impact is closely linked to the world commodity
prices, particularly oil (Economic Report 2010/2011; Ministry of Finance). The reason for
improving subsidies is to reduce the burden of society especially to the poor and disadvantaged
group.

3
TABLE 1: FEDERAL GOVERNMENT FINANCIAL POSITION 2009/2010 (RM MILLIONS).

2009 2010 2011*

Revenue 158,639 162,131 165,825
Operating expenditure 157,067 152,158 162,805
Current balance 1,573 9,972 3,020
Gross development expenditure 49,515 54,042 49,182
(-) Loan recovery 519 732 682
Net development expenditure 48,996 53,310 48,500
Overall balance (surplus/ deficit) -47,424 -43,338 -45,481
% of GDP -7.0 -5.6 -5.4
(*) estimate
Source: Economic Report, Ministry of Finance, 2010-2011.

Table 2 shows that the development expenditure increased from RM 49,515 million in 2009 to
RM 54,042 million in 2010. The rationale for allocating the budget for development purposes is
to upgrade rural basic infrastructure, urban transport, low income household and other social
services. These expenditure purposes have a significant role in sustaining growth momentum and
positive economic transformation.

Federal government has to collect revenue through tax collection and non-tax revenue to finance
its expenditures and to improve growth prospect of a country as well. There are several types of
tax and non-tax revenues such as service tax, sales tax, excise tax, export duties, import duties,
income tax and non-tax revenue (license, permit and investment income). Income tax is the
major tax revenue in Malaysia which is 47.6% and 44.4% of total revenue in 2006 and 2010,
respectfully (see table 2).

TABLE 2: FEDERAL GOVERNMENT REVENUE 2009/2010 (RM MILLIONS).

2009 2010 2011*

Tax revenue 106,504 107,092 115,501
Direct tax 78,375 76,156 83,983
From: Companies 30,199 33,248 36,210
Petroleum income tax 27,231 18,286 21,786
Individual 15,590 18,775 19,867
Indirect tax 28,129 30,936 31,518
From: Excise duties 10,068 11,835 12,026
Sales tax 8,603 8,241 8,411
Non-tax revenue 52,135 55,039 50,324
From: Licenses and permit 10,686 10,239 10,012
Investment income 37,394 39,458 33,174
Total revenue 158,639 162,131 165,825

4
 % of GDP 23.3 20.9 19.8
(*) estimate
Source: Economic Report, Ministry of Finance, 2010-2011

Figure 1 shows that a continuously deficit budget in Malaysia which means that the expenditure
is greater than its revenue and this scenario commonly happens in developing countries. The
results of the Malaysia show an increased expansionary fiscal policy to mitigate the impact of
economic slowdown in 2001, 2003 and 2008 years.

FIGURE 2: GOVERNMENT BUDGET FOR THE PERIOD 2000-2009 (IN RM MILLION).

Budget surplus / deficit (RM million)

0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
-10000
-20000
-30000
-40000
-50000
-60000

Source: Economic Report, Ministry Of Finance, for 2010-2011.

Table 3 shows the amount of domestic and external borrowing for the 2008-2011 period. As a
consequence, the national debt growth was reported by 12% for the 2009-2010 period and debt-
GDP growth ratio was 53.1% in 2010 (Malaysia Institute of Economic Research/
http://www.mier.org.my ). This result indicated to investigate the impact of fiscal policy in
Malaysian economy. This impact will be a positive/negative value in short run and long run.

TABLE 3: SOURCE OF FINANCE (RM BILLIONS).

2008 2009 2010 2011*

Domestic Borrowing 35.7 56.9 36.5 45.1
External Borrowing -0.5 -6.3 3.7 0.5
Change in asset 0.4 -3.2 3.1 -0.1
(*) estimate
Source: Economic Planning Unit, Ministry of Finance & Bank Negara Malaysia, 2010/2012.

5
 LITERATURE REVIEW

Several studies have been undertaken on the relationship between fiscal variables with other
macroeconomic variables. Some of these studies concentrated on: government expenditure
effect, government revenue, and other analysed both government expenditure and revenue (also
known as fiscal deficit/ surplus).

Many studies examined the relationship between government expenditure and GDP growth (Ho,
2001; Dakurah et al., 2001; Ansari, 2002; Jayaraman, 2009; Wahab, 2011). Ho (2001) employed
panel co-integration approach to 24 OECD countries and found a significant long run
relationship between income, private consumption and government expenditure.

Dakurah et al. (2001) also examined the relationship between government expenditure and
growth. However, they narrowed down the government expenditure to defence spending of 62
developing countries. Their study revealed a unidirectional causality in 23 countries from
defence expenditure to economic growth or vice versa, while bidirectional causality existed in 7
countries. Ansari (2002) on the other hand, analysed the impact of financial performance and
government spending on Malaysia’s income. He employed per capita income as a proxy of
Malaysia’s income and the results showed that government spending have no noticeable impact
on per capita income.

Jayaraman and Lau (2009) analysed the long run relationship between external debt, budget
deficit, economy growth and export for Pacific Island countries. They found the existence of
long run relationship among variables. They also found a unidirectional causality running from
budget deficit to GDP and bidirectional causality between external debt and GDP.

Wahab (2011) studied asymmetric output growth effects of government spending for developed
OECD and developed non-OECD countries. He found a positive relationship between
government consumption spending and government investment spending exerts positive and
significant output growth.

As a conclusion, most of the above literature detects the long run relationship between fiscal
variables and GDP/ growth. Only Ansari found no significant effect between fiscal variables and
income. We believe that this is due to the different proxy used and different time frame. This
paper hypothesised the long run relationship between government expenditure and GDP.

Beside the link between fiscal variables and GDP, other researchers also explore the possible
relationship between fiscal variables with other macroeconomics variables. Ogunmuyiwa (2011)
investigated the direction of causality as well as the impact of fiscal deficit on external debt in
Nigeria using the time series data from 1970-2007. He revealed that fiscal deficit is a specific

6
factor determining the size of external debt and no strict causality or causal relationship exists
between the variables. However, in a different study Jayaraman (2009) found a long run
relationship between budget deficit and external debt but did not find causality relationship
between variables in Pacific Island countries. Thus, in this paper, we hypothesised the long run
relationship between government expenditure and debt.

Moreover, Jayaraman (2009) and Wahad (2011) investigated the relationship between fiscal
variables and export. The results revealed that there was a long run relationship and bidirectional
causality between variables in Pacific Island countries. Further, Wahab (2011) examined the long
run relationship between variables in OECD countries, and also detected the long run
relationship between variables. In this study, we hypothesised the long run relationship between
government expenditure and export.

Furthermore, the relationship between fiscal variables and private consumption is investigated by
studies by many researchers. Ho (2001) found a negative relationship between government
expenditure and private consumption in OECD countries for the 1981-1997 period. However,
Nieh et al. (2006) found no long run relationship between the same variables in the similar
countries for the period of 1981-2000. Auteri and Constantini (2010) analysed the long run
relationship between public and private consumption in 15 European countries and found long
run relationship between variables.

DATA SOURCES AND VARIABLES

The aim of the current study is to evaluate the long run and direction of causality between GDP
(Y), external debt (Ed), government expenditure (G), export (X) and foreign direct investment
(FD). In addition to that, we used export and foreign direct investment due to its ability to
support economic growth and reduce the country’s debt.

However, annual data covering the 1970-2010 period used and all of the data were obtained from
World Bank. To investigate the relationship among the above variables Equation 1 used
(Jayaraman (2009).

…………………………………………………………………………….… [1]

Where

7
To ensure the analysis work pretty well, the first step is to make sure the data are used normally
distributed. The normal distribution is symmetric (skewness close to 0) and has a bell shape with
a peakedness and tail thickness leading to a kurtosis of 3 (Hill, et al., 2008). Table 4 shows the
descriptive statistics of the variables used in this study.

TABLE 4: SUMMARY STATISTIC FOR GDP, GOVERNMENT EXPENDITURES,

EXTERNAL DEBT, EXPORT AND FOREIGN DIRECT INVESTMENT.

LY G Ed X Fd
Mean 12.10 12.74 40.24 76.19 3.73
Median 12.09 12.89 39.00 75.00 4.00
Maximum 13.23 15.89 83.00 121.00 9.00
Minimum 10.76 9.87 12.00 34.00 1.00
Standard deviation 0.76 1.42 16.86 28.27 1.83
Skewness (SK) -0.14 0.01 0.39 0.18 0.77
Kurtosis (KS) 1.75 3.00 2.88 1.55 3.51
Jarque Bera 2.81 0.00 1.05 3.79 4.55
Probability 0.25 0.99 0.59 0.15 0.10
Observation 41 41 41 41 41
Source: Output of Eviews package, Version 7.1.

In the light of the results of SK and KS coefficients show that we reject the Ho for normality. The
result indicates that most of the variables are almost normally distributed. This due to the
skewness coefficient is close to 0 and kurtosis result is close to 3. Even though the data are not
absolutely normal, the test still can work pretty well if the observation are sufficiently large.

Furthermore, to avoid multicollinearity problem, we conduct the correlation analysis among

independent variables. The correlation coefficient (close to 1 or -1) is considered as strong
positive association or strong negative association respectively. Table 5 revealed that all
relationship between independent variables less than 0.9. This results shows that there is not
multicollinearity to be occured.

TABLE 5: CORRELATION MATRIX.

Export External Debt FDI Government

expenditures
Export 1 0.324* 0.145 -0.476**
External Debt 0.324* 1 -0.130 0.003
FDI 0.145 -0.130 1 -0.213
Government -0.476** 0.003 -0.213 1
expenditures
Note: * significant at 5%; ** significant at 1%

8
 METHODOLOGY

In order to achieve the objective of the study, it will apply appropriate techniques which are as
following (Munir, et al., 2011):

a. Unit root test: The first step is a stationary test for each variable which is done by using ADF
and PP tests at level I(0) [see Equation 2].
……………………………………………...…………… [2]
Where, yt represents each time series variable and it will be run individually. The time series is
not stationary if it contains unit root @ , however if ,the data is stationary. If the data
is not stationary, we have to proceed with stationary test at first difference I(1). If the data is not
stationary at first, we will proceed to test stationary at second difference. Usually, the
macroeconomics data will achieve stationary at first difference or second difference (Nelson and
Plosser, 1982; Tang, 2008; Bekhet and Othman, 2011).

b. Developing the log linear model: Due to data constraint, we adopt a log linear model [see
Equation 3]. This model has a logarithmic term on the left hand side of the equation and
untransformed (linear) variables on the right hand side. GDP (Y) transformed into log base (in
Ringgit Malaysia currency, RM), to be consisted with other independent variables (in
percentage).

…………………………. [3]

………….. [3.1]

Where; represent the changes of GDP growth if the particular independent

variables change by 1 unit. The is an error term and it represents a “storage bin” for
unobservable or unimportant factor affecting the dependent variable (Hill, et al., 2008).

c. Co-integration test: In the next step, we will utilise the co-integration test. The co-
integration can be captured by analysing the stationarity of the residual for equation 3.1. If the
residual is stationary at level, this indicates that there is long run equilibrium among variables
(Vogelvang, 2005). The decision whether to reject null hypothesis of no co-integration or not
depends on the value of ADF statistic for residual. If this value is smaller than the critical
value of ADF we have to reject the null hypothesis which means that there is no co-
integration (Hamilton, 1994; Fuller, 1976; and Volgelvang, 2005). This procedure is crucial
because the sensitivity is valid only if the variables have the same order of integration. ADF
and P.P tests for co-integration will be used to investigate the degree of integration.

9
d. The previous procedures (Unit root test and co-integration test) are a vital process in
determining which model (VAR, VECM, ARDL) suit to assess direction of causality among
variables. There are 3 possible outcomes: first outcome is the variable stationary but not co-
integrated. Second outcome is the variable stationary and co-integrated. Finally, the variable is
stationary and co-integrated but the sample is not large enough. For the first option, we will
employ VAR model (unrestricted VAR). For the second option, we will use VECM (restricted
VAR) (Jobert and Karanfil, 2007) and for the third option ARDL recommends. However, if
some variables are not stationary, we may use ARDL as well (Halicioglu, 2011).

Assuming that all variables are co-integrated, we will therefore use VECM to identify the nature
of the long run equilibrium relationship using the two steps procedure of Engle and Granger
(1987). In the first step, we estimate the long run model for Equation (3) in order to obtain the
estimated error [see equation 3.1, then we call it ect]. In the second step, we estimate granger
causality model with ect as per below [see Equations 4-8]:

∑ ∑ ∑ ∑ ∑
[4]

∑ ∑ ∑ ∑ ∑
[5]

∑ ∑ ∑ ∑ ∑
[6]
∑ ∑ ∑ ∑ ∑
[7]

∑ ∑ ∑ ∑ ∑
[8]

Where represents the natural log of GDP, and G, Ed, X and Fd represent government
expenditures, external debt, export and FDI respectively, while represents error correction
term. The VECM enables us to estimate the long run and short run Granger causality. The
coefficient (i=1,….,5) indicate the short run causality if the value is not equal
to zero. However, if these coefficients are equal to zero, this will indicate that there is no short
run causality among respective variables. Furthermore, the coefficients
indicate the long run causality if the coefficient is not equal to zero and vice versa.

RESULTS ANALYSIS

As stated earlier (in section 5), in order to determine the long run relationship among variables of
studies and to evaluate the direction of causality between variables, the first and foremost
procedure is to ensure the stability of the time series using ADF test. The PP test also used to
reconfirm the stationarity behavior of the time series. The results affirmed that all variables

10
(GDP growth, government expenditures, external debt, export and inflow of FDI) still contain a
unit root and were found to be non-stationary. However, after the first different, all variables
were found to be stationary at 5% (See Table 6).

TABLE 6: UNIT ROOT TEST.

Variables ADF statistic Critical value at P.P statistic Critical value at

At 1st different 5% level 5% level
LY -5.26 -2.94* -5.22 -2.94*
G -5.99 -2.94* -5.99 -2.94*
Ed -4.58 -2.94* -3.64 -2.94*
X -4.79 -2.94* -4.66 -2.94*
Fd -6.63 -2.94* -6.64 -2.94*
Note: * significant at 5% level.
Source: Output of Eviews Package, Version 7.1.

The second step of the time series procedure is to test whether there is a long run relationship
among variables. Co-integration test is carried out by using the Engle-Granger procedure that is
presented in Section (5). Through co-integration test, we found the existence of long run
relationship among variables. Table 7 shows the evidence to reject the null hypothesis of no co-
integration relationship.

TABLE 7: CO-INTEGRATION TEST.

Variable ADF statistic Critical value at 5% level Result

Residual ( ) -3.38 -2.94 Reject H0: No co-integration @
I(1)

Granger Causality

In order to detect the direction of causality between the variables, we apply the VECM. This
model enables us to detect the short run and long run causality at the same time. The results of
causality are presented in Equations (9-13).

Prob = (0.00) (0.28) (0.36) (0.53) (0.47) (0.39) (0.40)

0.11 ,
F Stat = 0.71 (0.64)
D/W = 1.98 [Equation 9]

11
 Prob = (0.71) (0.80) (0.75) (0.99) (0.81) (0.52) (0.28)
0.06
F Stat = 0.35 (0.90)
D/W = 1.98 [Equation 10]

Prob = (0.56) (0.00) (0.31) (0.15) (0.42) (0.18) (0.06)

0.42
F Stat = 3.84 (0.00)
D/W = 1.81 [Equation
11]

Prob = (0.00) (0.28) (0.36) (0.53) (0.47) (0.39) (0.40)

0.39
F Stat = 3.52 (0.00)
D/W = 2.02 [Equation 12]

Prob = (0.99) (0.96) (0.96) (0.38) (0.32) (0.08) (0.01)

0.33
F Stat = 2.71 (0.03)
D/W = 2.05 [Equation
13]

Based on the above equations, there is no appearance of causal direction from one variable to
another in the short run at 5% significant level. However, Equation 13, shows the significant
results for short run causality running from export to FDI at 10% significant level. In term of
long run causality, Equations 11 shows the appearance of long run causality running from GDP
growth, government expenditures, FDI and export to external debt at 10% significant level. The
coefficient for the ect is -0.06 and the probability value is 0.06, which is smaller than 0.10 or
equivalent to 10% significant level. The F-statistic is reported significant at 1% and the result for
Durbin Watson statistic is close to 2.

Furthermore, equation 13 shows a significant long run causality running from GDP growth,
government expenditure, external debt and export to FDI at 5% significant level. The coefficient
for ect is significant at 1% and 5% level. The F-statistic and Durbin Watson also show
appropriate results which are less than 5% significant level and 2.05 respectively. As a
conclusion, after coordinating the finding and the main objective of this study, we summarise the
results as shown in figure 3.

12
 FIGURE 3: CAUSAL RELATIONSHIP BETWEEN GOVERNMENT EXPENDITURE AND
EXTERNAL DEBT.

Government expenditure

Causal direction

External debt

CONCLUSION AND POLICY IMPLICATION

Expansionary fiscal policy can have either positive or negative impact to GDP growth. Some
researches show that expansionary fiscal policy can play an effective role in improving the
economy. This paper aims to provide evidence for the case of Malaysia on causal relationship
among expansionary fiscal policy, GDP growth, debt, export and FDI by using the co-integration
method for the 1970-2010 periods. The results show the existence of long run relationship
among variables and a unidirectional causality running from government expenditure and GDP
growth to external debt. The co-integration result was consistent with Ogunmuyiwa (2011) and
Jayaraman and Lau (2009). However, no causal relationship exists between government
expenditure and GDP growth. Also, this result is consistent with Ansari (2002).

Further, the finding has important policy implications. First, the expansionary fiscal policy in
Malaysia could increase the burden of the country, especially to the future generation rather than
directly stimulating the economic growth. With this kind of finding, this paper provides evidence
and suggestion to the policy maker to expand their source of financing such as rising taxes,
internal borrowing, printing money, etc. Malaysia cannot depend on one source of financing too
much or it could be risky especially for the future generation. However, evidence from the past
researchers identified a loophole for other types of financing which is to be explored and
extended in the future study.

Secondly, this finding provides us with the evidence that government expenditure does not give
direct causal relationship with GDP growth. However this is not the end of the road as other
mediating variables could stimulate GDP growth indirectly. In the future, we recommend
exploring the possible mediating variables that exist in between government expenditure and
GDP growth. Moreover, the finding of this paper is limited to number variables in this study
which we adapted from Jayaraman and Lau (2009), and actually there are more variables or

13
indicators to be explored. In the future, we would suggest finding more evidence and evaluation
of fiscal policy sustainability related to Malaysia cases.

REFERENCES

Abdullah, H.; Habibullah, M.S.; and Baharumshah, A.Z., (2009). The effect of fiscal variables on
economics growth in Asian Economies: a dynamic panel data analysis, International Journal of
Business and Management; 4(1), pp. 56-69.
Abu-Bader, S., and Abu-Qarn, A-S., (2003). Government expenditures, military spending and economic
growth: causality evidence from Egypt, Israel and Syria, Journal of Policy Modeling, 25, pp. 567-
853.
Adam, C.S.; and Bevan, D.L., (2005). Fiscal deficits and growth in developing countries, Journal of
Public Economics, (89), pp. 571-597.
Afonso, A; and Sousa, R M., (2011). What Are The Effects of Fiscal Policy on Asset Markets? Economic
Modelling,(28), pp 1871-1890.
Ansari, M.I., (2002). Impact of financial development, money and public spending on Malaysia national
income: an econometric study, Journal of Asian Economics, (13), pp. 72-93.
Arin, K P.; Mamun. A.; and Purushothman, N., (2009). The effects of Tax Policy on Financial markets: G3
Evidence. Review of Financial Economics, (18), pp. 33-46.
Bekhet HA, Othman NS (2011). Causality analysis among electricity consumption, consumer expenditure,
gross domestic product (GDP) and foreign direct investment (FDI): Case study of Malaysia. Journal
of Economics and International Finance, 3(4), pp. 228-235.
Castro, V., (2011). The impact of European Union fiscal rules on economic growth, Journal of
Macroeconomics, 33, pp313-326.
Economic Report 2010/2011, Ministry of Finance Malaysia.
Gujarati, D N.; and Porter, D C.; (2009). Basic Econometrics, Mc Grawhill International Edition, 5th
Edition.
rd
Hill, R C.; Griffith, W E., and Lim, G C.; (2008). Principles of Econometrics, Wiley, 3 Edition.
Ho, T-W., (2001). The government spending and private consumption: a panel cointegration analysis,
International Review of Economics and Finance, 10, pp. 95-108.
Jayaraman, T.K,; and Lau, E., (2009). Does external debt lead to economic growth in Pacific Island
countries, Journal of Policy Modeling, (31), pp 272-288.
Nieh, C-C,; and Ho, T-W., (2006). Does the expansinary government spending crowd out the private
consumption? Cointegration analysis in panel data, The Quarterly Review of Economics and
Finance, 46, pp 133-148.
Ogunmuyiwa, M.S., (2011). Does fiscal deficit determine the size of external debt in Nigeria?, Journal of
Economics and International Finance, 3, pp. 580-585.
Reddy, M.C., (2006). Assessing sustainability of Fiji’s Public Debt: A cointegration analysis approach
Saad, W., (2011). Assessing sustainability of Lebanese public debt: A cointegration analysis approach,
International Research Journal of Finance and Economics, issue 62.
Silvia, J., (2011). Monetary Policy, Fiscal Policy, and Confidence. International Journal of Economics
and Finance, 3, No. 4.
Studenmund, A H.; (2011). Using Econometrics: A Practical Guide, Pearson International Edition,
6th Edition.
Stock, J H.; and Watson, M W.; (2007). Introduction to Econometrics, Pearson International Edition,
2nd Edition.
Usman, A.; Mobolaji, H. I.; Kilishi, A A., Yaru, M A.; and Yakubu, T A., (2011). Public Expenditure and
Economic Growth In Nigeria. Asian Economic and Financial Review, 1 (3), pp. 104-113.
Wahab, M., (2011). Asymmetric output growth effects of government spending: Cross-sectional and panel
data evidence, International Review of Economics and Finance, 20, pp. 574-590.

14
Westerlund, J.; and Prohl., (2006). Panel cointegration test of the sustainability hypothesis in rich OECD
countries.

Country Authors Period of Variables used Methodology Results

study
OECD Ho; T-W., 1981- Private Panel co-integration Government expenditure,
countries (2001) 1997 consumption Dynamic OLS private expenditure and
Government disposable income are co-
consumption integrated.
Real disposable
income. Negative relationship
between government and
private consumption.
Consumers reduce
consumption to pay higher
tax. Tax is needed to
finance government
consumption.

OECD Nieh, C-C; 1981- Private Panel co-integration Government consumption

cuontries Ho, T-W; 2000 consumption DOLS and PMOLS and private consumption
(2006) Government are not co-integrated.
consumption
Price of public
and private
consumption
Malaysia Ansari, M.I; 1960- Real GDP/ Econometrics model All independent Variables
(2002) 1996 capita (VECM) are causally related to
M1/GDP dependent variables
Real M1
Ratio of Gross Government spending
Domestic shows no noticeable impact
Investment to on per capita income.
GDP
Real
Government
expenditure
Pacific Jayaraman, 1988- External debt Panel co-integration All variables are co-
Island T.K; Lau, E; 2004 Budget deficit FMOL (Fully integrated.
countries (2009) Economy growth modified)
Export Causal relationship running
from: (in SR)
Ed RGDP
X

BD
62 Dakurah, 1975- Defence Granger causality Unidirectional causality
developing A.H; Davies, 1995 spending Co-integration running from economy

15
 countries S.P; Sampath, Economy growth growth to defence spending
(less R.K ;(2001) in Sub-Saharan, 5 Latin
develop America, South and East
countries) Asia.

Unidirectional causality
from defence spending to
economy growth in 8 Sub-
Saharan, 4 Latin and one
South and East Asia.

No causality in 18
countries.
Develop Wahab, M; 1960- Government ARDL All variables are co-
OECD and (2011) 2004 spending Panel regression integrated
non GDP Panel ECM
OECD Gross private Government spending
countries domestic exerts positive and
investment statistically significant
Government output growth.
consumption
spending Government investment
Government spending exerts positive
investment and highly statistically
spending significant output growth
Export effect.
Import
Population
15 Auteri, M; 1970- Private and Co-integration The long run relationship
European Constantini, 2007 public between private and public
countries M; 2010 consumption consumption.
Nigeria Ogunmuyiwa, 1970- Fiscal deficit Granger causality Fiscal deficit is a specific
M.S (2011) 2007 External debt factor determining the size
of external debt in Nigeria.
Lebanese Saad, W 1965- Public debt ECM Revenue and expenditure
(2011) 2008 GDP are co-integrated.
Public Revenue
Public
Expenditure
Fiji Reddy, M 1970- Government Co-integration. Public expenditure and
(2006) 2004 expenditure Granger causality public revenue are not co-
Government integrated.
debt
Tax revenue
OECD Westerlund, 1977(Q1)- Public Debt Panel co-integration All variables are co-
countries J. and Prohl, 2005(Q4) Nominal interest integrated.
S. (2006) rate
Government
revenue
Government
expenditure.

16

View publication stats