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

In: Analytical Issues in Trade, Development and Finance

Author

Listed:
  • Mahendra Pal

    (Delhi School of Economics
    University of Delhi)

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.

Suggested Citation

  • Mahendra Pal, 2014. "Financial Development in India: An Empirical Test of the McKinnon–Shaw Model," India Studies in Business and Economics, in: Ambar Nath Ghosh & Asim K. Karmakar (ed.), Analytical Issues in Trade, Development and Finance, edition 127, chapter 24, pages 405-420, Springer.
    • Handle: RePEc:spr:isbchp:978-81-322-1650-6_24
    DOI: 10.1007/978-81-322-1650-6_24
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