The missing link: the finance-growth nexus and the Guyanese growth stagnation

Tarron Khemraj

MPRA Paper from University Library of Munich, Germany

Abstract: The theory underpinning financial liberalization postulates that unregulated financial markets are growth-augmenting. Guyana has been a model reformer since 1988, implementing market-friendly policies. Growth performance, however, has been subdued. This paper argues that natural entry barriers necessitate an oligopolistic banking structure, which follows a mark-up threshold loan interest rate rule at which business credit is constrained. Empirical validation of the mark-up loan rate comes from a bank excess liquidity preference curve that is horizontal at the high threshold rate. Moreover, the flat curve signifies that non-remunerated excess liquidity and interest paying business loans are perfect substitutes at the threshold loan rate. Once business credit is restricted, banks hold excess liquidity and/or foreign assets. Therefore, the Guyanese economy has evolved from a regime of government financial repression to private oligopoly bank stagnation; hence the missing link connecting finance and growth.

Keywords: Financial liberalization; growth; oligopoly interest rate (search for similar items in EconPapers)
JEL-codes: E40 E50 O11 (search for similar items in EconPapers)
Date: 2007-10
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Published in Social and Economic Studies 3&4.57(2008): pp. 105-129

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