Academic journal article International Journal of Business and Society

Fixed Investment, Household Consumption, and Economic Growth: A Structural Vector Error Correction Model (Svecm) Study of Malaysia

Academic journal article International Journal of Business and Society

Fixed Investment, Household Consumption, and Economic Growth: A Structural Vector Error Correction Model (Svecm) Study of Malaysia

Article excerpt

ABSTRACT

This paper examines the dynamic linkages between economic growth, fixed investment, and household consumption in Malaysia using a structural vector error correction model (SVECM) approach. The empirical results revealed that household consumption and fixed investment are significant in influencing the output growth in the short run. This finding tends to support the alternative view of growth hypothesis, namely fixed investment-led growth, and household consumption-led growth in the short run. In the long run, there is no significant effect of fixed investment and household consumption on growth. However, in the long run, there is a permanent effect of economic growth on household consumption and investment. This empirical finding implies that a demand side policy (for example through fiscal or monetary policy) which can affect the household consumption and investment is only effective to stimulate the economic activity in the short run. Thus a supply side policy would be needed to stimulate the economy in the long run.

Keywords: Economic growth, fixed investment, consumption, SVECM

(ProQuest: ... denotes formulae omitted.)

1. INTRODUCTION

The Keynesian macroeconomic model stipulates that household consumption and fixed investment play an important role in influencing economic growth by stimulating the aggregate expenditure. Therefore, the policy maker should implement an appropriate policy (for example, fiscal and monetary policy) in order to encourage household consumption and fixed investment spending. In the meantime, household consumption and fixed investment are cyclical components, in which they change according to the business cycle conditions. For example, according to Keynesian model, aggregate consumption is volatile rather than smooth because any changes in the current income is reflected in a change in consumption.

In the demand side model, economists have identified two key drivers of economic growth, namely finance, and export. Accordingly, there are two renowned growth hypotheses in the current literature with regard to the two key drivers; one is finance-led growth (FLG) and the other is export-led growth (ELG). However, previous literature has given little attention in examining other growth hypothesis such as household consumption-led growth (CLG) and investment-led growth (ILG). Good understanding of the role of consumption and fixed investment on growth is crucial to the policy makers in understanding whether they play an important role for economic growth. In addition, it also help them in designing an appropriate policy as to stimulate household consumption and fixed investment.

In the Malaysian context, studies related to the growth-hypothesis are still limited. There are two reasons why Malaysia is an interesting country to study with regard to the growth hypothesis. First, most of the studies in Malaysia have focused on finance-led growth and export-led growth hypotheses, but little attention has been given in examining the role of aggregate household consumption and fixed investment on economic growth. Ang and McKibbin (2007), and Ang (2008c), for examples, have supported the evidence of finance-led growth hypothesis while Baharumshah and Rashid (1999) have supported the evidence of the export-led growth in Malaysia. Thus this study will shed some lights on the importance of consumption and investment in stimulating the economic activity. Second, household consumption and investment have recently contributed a significant portion of Malaysian GDP. On average, since 2000 until 2009, the share of household consumption and investment on GDP is 70.7%1. This figure indicates the possibilities that consumption and investment led growth hypothesis may have some basis in Malaysian case.

This paper provides new empirical evidence about the linkages between economic growth, investment, and household consumption in Malaysia. Specifically, this study tries to answer two main questions. …

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