Financial Development in India: An Empirical Test of the McKinnon–Shaw Model

Mahendra Pal ()
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Mahendra Pal: Delhi School of Economics

Chapter 24 in Analytical Issues in Trade, Development and Finance, 2014, pp 405-420 from Springer

Abstract: Abstract India is a case of financial openness. The chapter examines theoretically and empirically, the McKinnon–Shaw model in India. According to McKinnon, a basic complementarity exists between money and physical capital. The model predicts that a high real interest rate policy will stimulate savings and investment and promote economic growth. The view stands in sharp contrast to the neoclassical and Keynesian views which contend that lowering the interest rate will stimulate investment and economic growth. Using time-series data for India for the period of 40 years (1971–2010), a simultaneous equations model for the money demand function and the saving function is tested with the help of two-stage least squares (2SLS) and ordinary least squares (OLS) technique. Positive and significant results are indicated for India. Results support continued financial liberalization with effective macroeconomic management.

Keywords: Financial repression; Financial deepening; Complementarity; Expected inflation rate; Debt intermediation view (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:spr:isbchp:978-81-322-1650-6_24

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DOI: 10.1007/978-81-322-1650-6_24

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