THE IMPACT OF MONEY SUPPLY ON ECONOMIC GROWTH IN MALAYSIA: EXAMINING THE MODERATING ROLE OF FINANCIAL DEVELOPMENT USING AN ARDL BOUNDS TESTING APPROACH

Abstract

This paper examines the dynamic relationship between money supply, financial development, and economic growth in Malaysia using annual data from 2000 to 2023. Applying the Autoregressive Distributed Lag (ARDL) Bounds Testing approach, the study evaluates the effects of broad money (M2), domestic credit to the private sector (DCPS), and their interaction term (M2×DCPS) to determine the moderating role of financial development in the money–growth nexus. The study reveals evidence of long-run cointegration among the variables, indicating a stable long-run equilibrium. The findings further show that both M2 and DCPS exert significant positive effects on real GDP, while the interaction term is also positive, suggesting that financial development enhances the transmission of monetary expansion to the real economy. The evidence also indicates that inflation and trade openness inhibit growth, whereas government expenditure contributes positively to economic performance. Diagnostic and stability tests (CUSUM and CUSUMSQ) confirm the robustness of the estimated model. These results imply that monetary expansion can effectively stimulate economic activity when supported by a well-developed financial sector. Policy implications highlight the importance of strengthening financial intermediation, improving credit allocation efficiency, and aligning monetary operations with financial-sector reforms to sustain Malaysia’s long-term economic performance.