Munich Personal RePEc Archive

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

Khemraj, Tarron (2007): The missing link: the finance-growth nexus and the Guyanese growth stagnation. Published in: Social and Economic Studies , Vol. 57, No. 3&4 (2008): pp. 105-129.

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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.

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