Browsing by Author "Stephen, Godlove"

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    Mckinnon's complementarity hypothesis in Tanzania: its intertemporal nature and evidence from cointegration analysis
    (University of Dar es Salaam, 2001) Stephen, Godlove
    McKinnon's complementarity hypothesis is one of several versions of financial repression hypothesis. The hypothesis deals with the effect of financial liberalization on the accumulation of capital through a policy of high real interest rates. The policy of high real interest rates helps to mobilize savings and channel them into more productive investment opportunities. This suggests a basic complementarity between money and physical capital in the production process. The hypothesis would be important for the Tanzanian economy since the financial sector was repressed by a series of government interventions that had the effect of keeping very low interest rates. The main objective of this study is to test relevance of the hypothesis in Tanzania basing the analysis on its intertemporal nature. The hypothesis is examined by using the modified Laumas' model since it allows explicit treatment of its intertemporal nature. Time series properties of data used are also examined in the study. The hypothesis is confirmed to be relevant in Tanzania. The relationship between deposits and private investment is found to be not only a function of relative rates of return, but also the intertemporal factors. A policy of high interest rates will have its full effect only after enough time has elapsed to eliminate any problems of credibility. So even if higher real deposit rates discourage private investment in the short run they may encourage it in the long run. Also a policy of maintaining a reasonable price level for a successful policy of financial liberalization is recommended.