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

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  • Khemraj, Tarron

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.

Suggested Citation

  • Khemraj, Tarron, 2007. "The missing link: the finance-growth nexus and the Guyanese growth stagnation," MPRA Paper 16342, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:16342
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    References listed on IDEAS

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    7. Judith Gold & Mr. Ruben V Atoyan & Miss Cornelia Staritz, 2007. "Guyana: Why Has Growth Stopped? An Empirical Study on the Stagnation of Economic Growth," IMF Working Papers 2007/086, International Monetary Fund.
    8. Khemraj, Tarron, 2007. "Monetary policy and excess liquidity: the case of Guyana," MPRA Paper 53126, University Library of Munich, Germany.
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    Cited by:

    1. constantine, collin, 2013. "Why Guyana's self discovery is the missing link in its development strategy," MPRA Paper 44205, University Library of Munich, Germany.
    2. Williams, Joycelyn, 2012. "Beyond Macroeconomic Stability: The Role of Selective Interventions in Guyana’s Growth," MPRA Paper 42755, University Library of Munich, Germany.
    3. Khemraj, Tarron & Hinova, Diana, 2011. "Elected Oligarchy and Economic Underdevelopment: The Case of Guyana," MPRA Paper 29733, University Library of Munich, Germany.
    4. Khemraj, Tarron, 2013. "Bi-communalism and the economic origins of democracy: a case study," MPRA Paper 47288, University Library of Munich, Germany.
    5. Grenade, Kari & Pasha, Sukrishnalall, 2012. "Accelerating Guyana’s Growth Momentum," MPRA Paper 41960, University Library of Munich, Germany.
    6. Pasha, Sukrishnalall, 2020. "The impact of political instability on economic growth: the case of Guyana," MPRA Paper 103145, University Library of Munich, Germany.
    7. Constantine, Collin, 2014. "Growth and Distribution: A Guyana Case Study," MPRA Paper 58882, University Library of Munich, Germany.

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    More about this item

    Keywords

    Financial liberalization; growth; oligopoly interest rate;
    All these keywords.

    JEL classification:

    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General

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