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

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Khemraj, Tarron

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Abstract

This paper argues that the liberalization of the Guyanese financial system did not lead to the growth as postulated by the theory that underpins the reform agenda. The paper posits that the oligopolistic nature of the banking system is the key omission of the theory. Oligopoly banks will seek to mark-up the loan rate and contract credit to private agents when those agents cannot pay the minimum mark-up rate. Empirical validation of the mark-up loan rate comes from an excess liquidity preference curve that is horizontal at a very high loan rate. The flat curve signifies that non-remunerative excess liquidity and interest paying loans are perfect substitutes at a very high loan rate. After banks restrict loans, they will either hold excess reserves and/or foreign assets. Such investment behavior presents a developmental bottleneck, and therefore a key explanation for the growth stagnation after the liberalization. The paper also argues that indirect monetary policy, a cornerstone of financial liberalization, is ineffective at the high minimum mark-up rate. Monetary policy can only be effective at very high interest rates, which are detrimental to growth and employment creation.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 4722.

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Date of creation: Jul 2007
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Handle: RePEc:pra:mprapa:4722

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Related research
Keywords: finance-growth nexus oligopoly banking monetary policy Guyana

Find related papers by JEL classification:
O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
O11 - Economic Development, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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References listed on IDEAS
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  1. Philip Arestis & Machiko Nissanke & Howard Stein, 2005. "Finance and Development: Institutional and Policy Alternatives to Financial Liberalization Theory," Eastern Economic Journal, Eastern Economic Association, vol. 31(2), pages 245-263, Spring. [Downloadable!]
  2. Agenor, Pierre-Richard & Aizenman, Joshua & Hoffmaister, Alexander W., 2004. "The credit crunch in East Asia: what can bank excess liquid assets tell us?," Journal of International Money and Finance, Elsevier, vol. 23(1), pages 27-49, February. [Downloadable!] (restricted)
    Other versions:
  3. Ajit Singh, 1998. "Financial liberalisation, stockmarkets and economic development," Nova Economia, Economics Department, Universidade Federal de Minas Gerais (Brazil), vol. 8(1), pages 165-182.
    Other versions:
  4. Philip Arestis & Machiko Nissanke & Howard Stein, 2005. "Finance and Development: Institutional and Policy Alternatives to Financial Liberalization Theory," Eastern Economic Journal, Palgrave Macmillan Journals, vol. 31(2), pages 245-263, Spring. [Downloadable!] (restricted)
  5. Fry, Maxwell J., 1982. "Models of financially repressed developing economies," World Development, Elsevier, vol. 10(9), pages 731-750, September. [Downloadable!] (restricted)
  6. Bencivenga, V.R. & Smith, B.D., 1988. "Financial Intermediation And Endogenous Growth," RCER Working Papers 124, University of Rochester - Center for Economic Research (RCER).
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  7. Graciela L. Kaminsky & Carmen M. Reinhart, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June. [Downloadable!] (restricted)
    Other versions:
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