The impact of financial development (FD) on economic growth in the context of Malaysia and Indonesia has been examined in this study regarding the role of the financial crisis and strategic changes in the institutional setup. Autoregressive distributed lags and threshold regression were applied, and time series data were analyzed for the period between 1984 and 2017 revealing that FD promoted the economic growth in both economies during this period. A nonlinear analysis also revealed that FD and economic growth follow an inverted U‐shape relation in the case of Malaysia whereas, in Indonesia, it followed a U‐shape relation. It was discovered that not all measures of FD promote economic growth. For instance, market capitalization was profound in the Malaysian economy while credit to the private sector and money supply was conducive for the Indonesian economy. The analysis demonstrated that the Asian and global financial crisis adversely affected economic growth in the case of Indonesia due to poor institutional quality (IQ), whereas in Malaysia it was relatively safe from the adversity brought about by the financial crisis due to the presence of IQ and good corporate governance. However, a positive change in IQ was found to have a much greater impact on augmenting economic growth rather than playing a mediating role in connection with FD and economic growth in Malaysia. In the context of Indonesia however, IQ was found to impede economic growth but played a positive and significant mediating role in the nexus of FD and economic growth. The spill‐over analysis revealed that Malaysian FD is positively associated with Indonesian economic growth while Indonesian FD is negatively associated with the Malaysian economy. This study provided all economic and anecdotal explanations in supporting the results of this study.
|Early online date||6 Sep 2019|
|Publication status||Published - Sep 2019|