5. Conclusions
This study examined the role of credit in influencing financial stability in Malaysia. The theory of credit expansion has been gaining popularity in recent years, especially in promoting economic growth. Nevertheless, there is limited econometric evidence tracing the link between credit expansion and financial stability at the disaggregated level, particularly in an emerging market, such as Malaysia, which from 2009 – 2013 ranked first in the Doing Business report published by World Bank for obtaining credit easily. A financial stability index is constructed to measure financial stability, using a broad range of financial and market-based variables. Based on the dynamic factor model, a negative (positive) estimated coefficient indicated that the Malaysian financial system tightens (relaxes). By adopting a series of forecasting tests, the index appears to be predictive of the Malaysian business cycle as well as showing up rather well regarding the events of financial downturns in Malaysia. The non-parametric statistics, namely a concordance index, OLS and GMM estimations are subsequently adopted to measure the degree of synchronization between credit and financial stability. Based on the concordance index, OLS and GMM estimation, the empirical results indicated that there is insufficient evidence to prove that household credit is influencing financial stability in Malaysia. The results were rather surprising.
