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Re-Examining the Finance-Growth Nexus: Empirical Evidence from Indonesia

Gadjah Mada International Journal of Business (GamaIJB) · Vol. 9 No. 2 (2007) · pp. 137–156

DOI
10.22146/gamaijb.5597
ISSN
2338-7238, 1411-1128
Published
2007-06-12
Publisher
Master in Management, Faculty of Economics and Business, Universitas Gadjah Mada
Language
eng

Abstract

This paper empirically examines the short- and long-run relationships between financial development and economic growth during the post-1997 financial crisis in Indonesia by employing a battery of times-series techniques, such as Autoregressive Dis-tributed Lag (ARDL) model, vector error correction model (VECM), variance decompositions (VDCs), and impulse-response functions (IRFs). Based on the ARDL (2, 0, 1, 2) model, the study finds that there exists a long-run equilibrium between economic growth and financial depth, share of investment, and inflation. In the long run, inflation is found to be the only variable which significantly (negatively) affects economic growth, implying a crucial role of maintaining a low rate of inflation in promoting the economic growth in the country. As for the dynamic causalities among the variables, the study finds the bidirectional causation between economic growth and investment, while the unidirectional causation is only found running from financial depth to investment. The finding of independence between economic growth and financial development supports the view of “the independent hypothesis” of Lucas (1988). Finally, based on VDCs and IRFs, the study documents that the variations in the economic growth respond more to shocks in the price stability (inflation), followed by investment and financial development. Our findings indicate that if policy makers want to promote growth, attention should be focused on long-run policies, i.e., maintaining the low rate of inflation.

Keywords

Collaboration network of the authors

13 authors · 16 co-authorship links · 10 across different organisations

Hover or tap a name to highlight its co-authors. Double-click to open the author's page.

  • International Islamic University Malaysia
  • Universitas Syiah Kuala
  • Universiti Malaysia Sarawak
  • Universiti Teknologi Petronas
  • International Centre for Education in Islamic Finance
  • Universiti Sains Malaysia
  • Affiliation unknown
  • Different organisations
  • Same organisation
  • Affiliation unknown
  • Thicker line = more joint articles · bigger circle = more articles
Show as table
Co-authorOrganisationJoint articles
Hartomi MaulanaAffiliation unknown1
Said MusnadiUniversitas Syiah Kuala1
Indra Yadi PutraUniversitas Syiah Kuala1
Bakri bin Abdul KarimUniversiti Malaysia Sarawak1
Samsul Ariffin Abdul KarimUniversiti Teknologi Petronas1
Naziruddin AbdullahInternational Islamic University Malaysia1
Salina KassimInternational Islamic University Malaysia1
Mohd Azmi OmarInternational Centre for Education in Islamic Finance1
Ronald RulindoInternational Islamic University Malaysia1
Rosylin Mohd YusofInternational Islamic University Malaysia1
Hasan BasriUniversitas Syiah Kuala1
A.K. Siti‐NabihaUniversiti Sains Malaysia1

Affiliations come from OpenAlex; journal OAI-PMH metadata carries none. Authors without an OpenAlex ID are matched by name, which can merge or split people.

Metadata source: OAI-PMH (metadata jurnal) https://journal.ugm.ac.id/gamaijb/oai, first harvested 28 Okt 2026, last seen 28 Okt 2026.
Original metadata (oai_dc) 
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	<dc:title xml:lang="en-US">Re-Examining  the Finance-Growth Nexus:  Empirical Evidence from Indonesia</dc:title>
	<dc:creator>Abd. Majid, M. Shabri</dc:creator>
	<dc:subject xml:lang="en-US">Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Financial Markets; Saving and Capital Investment; Corporate Finance and Governance</dc:subject>
	<dc:subject xml:lang="en-US">ARDL; financial development; growth; impulse response function; Indonesia; multivariate causality</dc:subject>
	<dc:description xml:lang="en-US">This paper empirically examines the short- and long-run relationships between financial development and economic growth during the post-1997 financial crisis in Indonesia by employing a battery of times-series techniques, such as Autoregressive Dis-tributed Lag (ARDL) model, vector error correction model (VECM), variance decompositions (VDCs), and impulse-response functions (IRFs). Based on the ARDL (2, 0, 1, 2) model, the study finds that there exists a long-run equilibrium between economic growth and financial depth, share of investment, and inflation. In the long run, inflation is found to be the only variable which significantly (negatively) affects economic growth, implying a crucial role of maintaining a low rate of inflation in promoting the economic growth in the country. As for the dynamic causalities among the variables, the study finds the bidirectional causation between economic growth and investment, while the unidirectional causation is only found running from financial depth to investment. The finding of independence between economic growth and financial development supports the view of “the independent hypothesis” of Lucas (1988). Finally, based on VDCs and IRFs, the study documents that the variations in the economic growth respond more to shocks in the price stability (inflation), followed by investment and financial development. Our findings indicate that if policy makers want to promote growth, attention should be focused on long-run policies, i.e., maintaining the low rate of inflation. </dc:description>
	<dc:publisher xml:lang="en-US">Master in Management, Faculty of Economics and Business, Universitas Gadjah Mada</dc:publisher>
	<dc:date>2007-06-12</dc:date>
	<dc:type>info:eu-repo/semantics/article</dc:type>
	<dc:type>info:eu-repo/semantics/publishedVersion</dc:type>
	<dc:type xml:lang="en-US">Peer-reviewed Article</dc:type>
	<dc:format>application/pdf</dc:format>
	<dc:identifier>https://journal.ugm.ac.id/gamaijb/article/view/5597</dc:identifier>
	<dc:identifier>10.22146/gamaijb.5597</dc:identifier>
	<dc:source xml:lang="en-US">Gadjah Mada International Journal of Business; Vol 9, No 2 (2007): May - August; 137-156</dc:source>
	<dc:source>2338-7238</dc:source>
	<dc:source>1411-1128</dc:source>
	<dc:language>eng</dc:language>
	<dc:relation>https://journal.ugm.ac.id/gamaijb/article/view/5597/4568</dc:relation>
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