An Examination of the Government Spending and Economic Growth Nexus for Malaysia Using the Leveraged Bootstrap Simulation Approach

Abstract

The main objective of this study is to re-examine the government spending-growth nexus for Malaysia from the perspective of disaggregated government spending. The yearly data from 1960 to 2007 is used in this study. This study applied the bounds testing for co-integration and the leveraged bootstrap simulation approaches to examine the relationship between three different categories of government spending and national income in Malaysia. It is found that government spending on education and defence are co-integrated with national income. Nevertheless, there is no evidence of co-integrating relation between government spending on health and national income. The MWALD causality test shows strong evidence of unidirectional causal relationship running from national income to the three major government spending in Malaysia. However, bilateral causality evident exists only between government spending on health and national income.

Keywords:

• Government spending
• growth
• MWALD
• leveraged bootstrap

JEL Classification:

• C22
• E60
• H50

Acknowledgements

The author would like to thank the anonymous referees. The author would also like to thank Professor Dr. Hatemi-J and Professor Dr. Junsoo Lee for sharing their GAUSS™ and RATS codes used to conduct the leveraged bootstrap causality tests and LM unit root tests, respectively. In addition, this research work was funded by USM Fellowship, Universiti Sains Malaysia. The usual disclaimer applies.

Notes

1. The MWALD test is applicable irrespective of whether the series are integrated of either I(0) or I(1) process. Therefore, the use of the MWALD test may reduce the likelihood of making the wrong decision on the degree of integration (Tang, 2008b). Zapata and Rambaldi (1997) documented that the MWALD test is not sensitive to the specification of the short run dynamic as in the error-correction models (ECMs) because the test is based on the augmented VAR model.

2. In order to save space, the results of ADF and PP unit root tests are not reported here, but they are available upon request from the author.