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McKinnon-Shaw Complimentarity Hypothesis: Evidence From Lesotho

Author

Listed:
  • Sephooko Motelle
  • Rethabile Masenyetse

    (Central Bank of Lesotho)

Abstract

A number of developing countries have implemented financial reforms as a mechanism towards improving the process of financial intermediation and ultimately economic growth. Lesotho has also implemented a series of reforms in the financial sector including interest rate liberalization and introduction of indirect instruments of monetary policy. The paper investigated the validity of McKinnon- Shaw complementarity hypothesis in Lesotho using the quarterly data covering 1990-2006. The hypothesis argues that there is a positive relationship between real money and physical capital. Using granger causality and error correction models (ECM), the study found empirical support for the complementarity hypothesis in Lesotho. Thus the ongoing financial reforms play an important role in enhancing fixed capital formation and economic growth.

Suggested Citation

  • Sephooko Motelle & Rethabile Masenyetse, 2012. "McKinnon-Shaw Complimentarity Hypothesis: Evidence From Lesotho," The African Finance Journal, Africagrowth Institute, vol. 14(1), pages 102-114.
    • Handle: RePEc:afj:journl:v:14:y:2012:i:1:p:102-114
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    JEL classification:

    • F2 - International Economics - - International Factor Movements and International Business
    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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