Financial Liberalization in India and a New Test of the Complementarity Hypothesis

Eric Pentecost and Tomoe Moore

Economic Development and Cultural Change, 2006, vol. 54, issue 2, 487-502

Abstract: This article reappraises the financial repression hypothesis for India in light of the partial liberalization of the financial sector in the early 1990s, using for the first time state-of-the-art multivariate cointegration and vector error correction models (VECM). From this more robust testing procedure, we find that for the Indian economy over the sample period 1951-99, money and capital are complementary, suggesting that higher real interest rates will further raise the demand for money and lead to higher levels of investment. Furthermore, testing for a structural break in the early 1990s--to coincide with the liberalization of the financial sector in India--suggests that these reforms have not significantly changed the complementary relationship between money and capital. The policy implication is that further financial liberalization maybe required in India to enhance investment and economic growth.

Date: 2006
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Persistent link: https://EconPapers.repec.org/RePEc:ucp:ecdecc:y:2006:v:54:i:2:p:487-502

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