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A Critical Appraisal of McKinnon's Complementarity Hypothesis: Does the Real Rate of Return on Money Matter for Investment in Developing Countries?

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  • Moore, Tomoe

Abstract

Summary McKinnon's [McKinnon, R. I. (1973). Money and capital in economic development. Washington, DC: The Brookings Institution] complementarity hypothesis predicts that money and investment are complementary due to self-financed investment, so that a real deposit rate is the key determinant of capital formation for developing economies. This paper critically appraises this contention by conducting a vigorous empirical approach using panel data for 107 developing countries. The long-run and dynamic estimation results based on McKinnon's theoretical model are supportive of the hypothesis. However, when the investment model is conditioned by factors such as financial development, different income levels across developing countries, external inflows, public finance, and trade constraints, the credibility of the hypothesis is undermined.

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  • Moore, Tomoe, 2010. "A Critical Appraisal of McKinnon's Complementarity Hypothesis: Does the Real Rate of Return on Money Matter for Investment in Developing Countries?," World Development, Elsevier, vol. 38(3), pages 260-269, March.
    • Handle: RePEc:eee:wdevel:v:38:y:2010:i:3:p:260-269
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    1. Pradyumna Dash, 2016. "The Impact of Public Investment on Private Investment: Evidence from India," Vikalpa: The Journal for Decision Makers, , vol. 41(4), pages 288-307, December.
    2. Kilindo, A.A.L., 2020. "An Empirical Appraisal of McKinnon’s Complementarity Hypothesis in Tanzania," African Journal of Economic Review, African Journal of Economic Review, vol. 8(3), November.

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