The Impact of Domestic Public Debt on Financial Development in Malaysia

Mok Wei Mun,Normaz Wana Ismail

doi:10.5296/ijssr.v3i2.7167

Abstract

When the government heavily borrows domestically from the banking sector to finance its expenditures, there is possibility that public debt will lead to a crowding out effect on private investment since bank credit is a primary funding source for the private sector. This study examines the linkages between domestic public debt and financial development in Malaysia for the period of 1980 to 2010. Our analysis suggests that domestic public debt from banks has a negative relationship with financial development. Meanwhile, the crowding out effect is evident during the occurrence of financial crises.

Highlights

It is widely believed that the government spending plays an important role to influence the level of economic growth
Since the Malaysian economy was badly affected during the 1997 financial crisis and 2008 European sovereign debt crisis, we introduce a dummy variable in Model B to capture the presence of a crisis due to an unanticipated shock
The empirical results show that the domestic public debt from banks has a statistically negative impact on the financial development during the period of financial crisis

Summary

Introduction

It is widely believed that the government spending plays an important role to influence the level of economic growth. A large size of government spending can lead to a budget deficit when expenses exceed tax revenues. The government can always impose taxes, borrow from domestic and foreign sources, or print money to reduce the size of the budget deficit (Feldstein, 1985; Adam & Bevan, 2005; Loganathan, Sukemi, & Sanusi, 2010). The budget deficit is always associated with a large debt burden when borrowing is a financing option. The government has incurred large public debt in order to meet its high development expenditure. The size of total public debt (domestic and foreign) has accelerated at an alarming rate and reached RM 617,463 million or 53.6 per cent of GDP in 2010

Objectives

Results

Conclusion