Revisiting the Role of Public Debt in Economic Growth: The Case of Malaysia

The European sovereign debt crisis stroked the global economy when countries such as Greece, which had been maintaining high levels of debt and fiscal deficit, faced the risk of insolvency on public debt. Besides, rising debt level of Malaysia have raised the concern of policymakers and academician in discussion of whether Malaysia would face a similar public debt crisis. This had raised the interest and a motivation to conduct an empirical analysis to determine the long run relationship between public debt and economic growth for Malaysia. Using annual data spanning from 1980-2012, the long run relationships of the variables were determined by estimating an equation using Johansen and Juselius Cointegration estimate. Besides that, Granger causality relationship between public debt and economic growth was also determined from the result of Granger causality test. Based on the findings of the empirical analysis, there is evidence that led to the conclusion that debt ratio positively affects economic growth in the long run consistent with what was found in the literature. Nonetheless, the result also shows economic growth is significantly granger causing public debt in Malaysia.