UPSI Digital Repository (UDRep)
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Abstract : Universiti Pendidikan Sultan Idris |
The relationship between budget deficit and economic growth is one of the most important
issues debated by economists and policymakers in developed and developing
countries. The purpose of this study is to examine the relationship by concentrating on
theoretical debates, empirical studies and econometric models to obtain substantive
conclusions. These conclusions are beneficial in the field of macroeconomics.
Construction or development of macroeconomic models is used to analyze the impact of budget
deficit on Malaysia’s economic growth. The effects of the budget deficit formation would lead
to the formation of other macroeconomic variables, such as debt, rising interest rates and
decreasing government spending, productive or non- productive. This study was conducted
using time series data collected from 1985 to 2018 to fulfil three specific objectives. The first
objective is to identify the relationship that exists between all the selected variables and Gross
Domestic Product (GDP) in the prescribed regimes. The second objective is to compare the effects of
deficit formation on economic growth and the last objective is to investigate the dominant factor
across regime. The Auto-Regressive Distributed Lag (ARDL) model is used to analyze the co-
integration and causal direction relationship between budget deficit and economic
growth. The results show a long-term relationship of all the selected variables with
GDP. This finding supported with the value of Error Correction Term (ECT) at -3.9874
and significant at level 99 percent, in general model. In addition, there are different
effects of budget deficits and dominant factor in each regime. This result supports the
hypotheses set out in this study. There are existences of a long-term relationship
between the two variables, a deficit-GDP effect and different dominant factor in each
regime. In conclusion, the formation of a budget deficit that further forms other
macroeconomic variables in the economy is seen to have an empirical impact on
Malaysia's GDP. This study is expected to contribute to the idea that, there are several
dynamic factors impacting the formation of budget deficit on GDP. Comprehensive
knowledge is a necessary in efforts to increase productivity and living standards of
people to ensure the stability of Malaysia’s economic system in future.
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