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Do Financial Sector Policies Promote Innovative Activity in Developing Countries? Evidence from India

Ang, James (2009): Do Financial Sector Policies Promote Innovative Activity in Developing Countries? Evidence from India.

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Abstract

This paper attempts to shed some light on the role of financial sector policies in generating new knowledge, drawing on the experience of one of the fastest growing and largest developing countries. Using relatively long time series data, the results in this paper indicate that interest rate restraints help generate knowledge in India’s economy. Other financial repressionist policies, in the form of high reserve and liquidity requirements as well as significant directed credit controls, appear to have a dampening effect on ideas production. The results lend some support to the argument that some form of financial sector reforms may help stimulate economic growth via increasing innovative activity.

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