Does money matter in developing economies? Some evidence from the Solow estimator

Ali F. Darrat and Yousif K. Al‐Yousif

Review of Financial Economics, 1998, vol. 7, issue 2, 213-220

Abstract: Building on the Solow seminal approach for estimating the output elasticity of money stock and on Startz's (1984) implementation of it, this article explores the role of money in the production process in Kuwait, Saudi Arabia, and the United Arab Emirates. Due to lack of necessary data on interest rates in these countries, we use alternative measures of credit constraints as proxies. In contrast to Startz's conclusion for the U.S., our empirical results systematically reveal significant output elasticities of money in each of the three developing countries under study. This is consistent with the neoclassical monetary theory and its incorporation of real money balances as an important input in the production function. Moreover, as the McKinnon‐Shaw hypothesis contends, money appears to be complementary to physical capital in the three developing countries. Hence, policy‐makers must not hinder the development of their money (financial) markets if they desire to promote economic growth.

Date: 1998
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https://doi.org/10.1016/S1058-3300(99)80155-4

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Persistent link: https://EconPapers.repec.org/RePEc:wly:revfec:v:7:y:1998:i:2:p:213-220

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