Testing financial liberalization hypothesis with ARDL modelling approach

Abstract

It is a stylised fact that financial 'repression' retards economic growth. Hence, financial liberalization is advocated to remove the stranglehold on the economy. Financial liberalization policy argues that deregulation of interest rate would result in a higher real interest rate which would lead to increased savings, increased investment and achieve efficiency in financial resource allocation. Past studies have reported inconclusive results regarding the interest rate effects on savings and investment. This examines the financial liberalization hypothesis by employing autoregressive distributed lag (ARDL) modelling approach on Nepalese data. Results show that the real interest rate affects both savings and investment positively.

Investment, Savings, Interest Rate and Bank Credit to the Private Sector Nexus in Pakistan

“…The coefficient of real rate of deposits, though positive and statistically significant, but its value is very small. Nevertheless its positive sign proves the McKinnon complementary hypothesis that high real deposit rate of interest promotes the capital formation (investment) by increasing the supply of credit through savings (McKinnon and Shaw, 1973).This result is also consistent with Athukorala (1998), Shrestha (2007) and Khan (1992).…”

“…Athukorala (1998) supported the complementarity hypothesis of McKinnon and Shaw (1973) that high rate of interest stimulated investment through self financed savings in India. The policy of deregulation of the interest rate promotes the savings and investment and attains the efficient allocation of financial resources (Shrestha and Chowdhury, 2007). The growth of any economy depends on capital accumulation, and this requires investment with matching savings (Thirlwall, 2004).…”

Rate of Interest, Financial Liberalization & Domestic Savings Behavior in Pakistan

“…It shows that a 1 percent increase in real rate of interest on deposits tends to increase the domestic savings by 2.02%, but coefficient is small, indicating more need for deregulation of interest rate. This positive relationship between savings and real rate of interest on deposits is consistent with the previous studies conducted by Athoukarala, (1998), Shrestha, et al (2007), Ghatak (1997), McKinnon and Shaw (1973) and Khan, et al (1992). Athukorala and Rajapatirana (1993) also examined that changes in the interest rate negatively affected the real cash holdings and positively affected the real savings (financial and total) and time deposits after these reforms.…”

Financial Liberalization and Economic Growth in Turkey: A Reexamination

“…Another strand of the literature which analyze the relationship between financial liberalization and economic growth handles the issue with regards to the impact of financial liberalization on saving and investment decisions (Hermes, 1996;Bonfioli, 2005;Shresta, Chowdhury, 2007). The results of these studies confirm the McKinnon Show hypothesis which argues that the financial liberalization will increase savings and investments.…”