IDEAS home Printed from https://ideas.repec.org/a/ers/ijfirm/v12y2022i3p3-22.html
   My bibliography  Save this article

An Econometric Analysis on Interest Rate Reforms and Financial Deepening

Author

Listed:
  • Laxman Tandan
  • Ananta Raj Kafle
  • Khageshyor Khanal

Abstract

Purpose: This paper intends to analyze the impact of interest rate reforms on financial deepening in Nepal during 1989 Q1 to 2021 Q2. Design/Methodology/Approach: This paper uses seven different measures of financial deepening and applied vector error correction model. An empirical result strongly supports the hypothesis that interest rate reforms lead to financial deepening and did not supported by two variables export and change of deposit. Similarly, Granger causality test show the unidirectional causal relationship among most of the variables. Findings: The findings suggest that financial reforms need to accelerate the financial reforms that was lunched since 1989 and to improve the efficiency of the financial system, stimulate the saving /investment and economic growth.

Suggested Citation

  • Laxman Tandan & Ananta Raj Kafle & Khageshyor Khanal, 2022. "An Econometric Analysis on Interest Rate Reforms and Financial Deepening," International Journal of Finance, Insurance and Risk Management, International Journal of Finance, Insurance and Risk Management, vol. 12(3), pages 3-22.
    • Handle: RePEc:ers:ijfirm:v:12:y:2022:i:3:p:3-22
    as

    Download full text from publisher

    File URL: https://journalfirm.com/journal/321/download
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Hunter, John & Menla Ali, Faek, 2014. "Money demand instability and real exchange rate persistence in the monetary model of USD–JPY exchange rate," Economic Modelling, Elsevier, vol. 40(C), pages 42-51.
    2. Peter L. Rousseau & Paul Wachtel, 2011. "What Is Happening To The Impact Of Financial Deepening On Economic Growth?," Economic Inquiry, Western Economic Association International, vol. 49(1), pages 276-288, January.
    3. Ahmed, Abdullahi D., 2013. "Effects of financial liberalization on financial market development and economic performance of the SSA region: An empirical assessment," Economic Modelling, Elsevier, vol. 30(C), pages 261-273.
    4. Oriana Bandiera & Gerard Caprio & Patrick Honohan & Fabio Schiantarelli, 2000. "Does Financial Reform Raise or Reduce Saving?," The Review of Economics and Statistics, MIT Press, vol. 82(2), pages 239-263, May.
    5. Peter R. Hansen & Asger Lunde & James M. Nason, 2011. "The Model Confidence Set," Econometrica, Econometric Society, vol. 79(2), pages 453-497, March.
    6. Birendra Bahadur Budha, 2013. "The Bank Lending Channel of Monetary Policy of Nepal: Evidence from Bank Level," NRB Working Paper 17/2013, Nepal Rastra Bank, Research Department.
    7. Abdul Abiad & Ashoka Mody, 2005. "Financial Reform: What Shakes It? What Shapes It?," American Economic Review, American Economic Association, vol. 95(1), pages 66-88, March.
    8. Madsen, Jakob B. & Islam, Md. Rabiul & Doucouliagos, Hristos, 2018. "Inequality, financial development and economic growth in the OECD, 1870–2011," European Economic Review, Elsevier, vol. 101(C), pages 605-624.
    9. Birendra Bahadur Budha, 2013. "The Bank Lending Channel of Monetary Policy in Nepal: Evidence from Bank Level Data," NRB Economic Review, Nepal Rastra Bank, Research Department, vol. 25(2), pages 43-65, October.
    10. Lutkepohl, Helmut & Reimers, Hans-Eggert, 1992. "Impulse response analysis of cointegrated systems," Journal of Economic Dynamics and Control, Elsevier, vol. 16(1), pages 53-78, January.
    11. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 39(3), pages 106-135.
    12. Banerjee, Anindya & Dolado, Juan J. & Galbraith, John W. & Hendry, David, 1993. "Co-integration, Error Correction, and the Econometric Analysis of Non-Stationary Data," OUP Catalogue, Oxford University Press, number 9780198288107.
    13. Nephil Matangi Maskay Ph.D. & Rajendra Pandit, 2010. "Interest Rate Pass-Through in Nepal," NRB Economic Review, Nepal Rastra Bank, Research Department, vol. 22, pages 1-18, April.
    14. Ye Guo & Chen Liang, 2016. "Blockchain application and outlook in the banking industry," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 2(1), pages 1-12, December.
    15. Dada James Temitope & Awoleye Emmanuel Olayemi, 2018. "Financial Deregulation and Economic Growth in Nigeria: Evidence from Error Correction Model," Romanian Economic Journal, Department of International Business and Economics from the Academy of Economic Studies Bucharest, vol. 21(69), pages 2-13, September.
    16. Tullio Jappelli & Marco Pagano, 1994. "Saving, Growth, and Liquidity Constraints," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(1), pages 83-109.
    17. Najia Saqib, 2016. "Banking sector liberalization and economic growth: case study of Pakistan," Journal of Business Economics and Management, Taylor & Francis Journals, vol. 17(1), pages 125-139, February.
    18. Birendra Bahadur Budha, 2013. "The Bank Lending Channel of Monetary Policy in Nepal: Evidence from Bank Level Data," NRB Economic Review, Nepal Rastra Bank, Economic Research Department, vol. 25(2), pages 43-65, October.
    19. Barry Eichengreen & David Leblang, 2003. "Capital account liberalization and growth: was Mr. Mahathir right?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 8(3), pages 205-224.
    20. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    21. Ang, James B. & McKibbin, Warwick J., 2007. "Financial liberalization, financial sector development and growth: Evidence from Malaysia," Journal of Development Economics, Elsevier, vol. 84(1), pages 215-233, September.
    22. Oludele Akinloye Akinboade & Emilie Chanceline Kinfack, 2013. "Interest rate reforms, financial deepening and economic growth in Cameroon: an empirical investigation," Applied Economics, Taylor & Francis Journals, vol. 45(25), pages 3574-3586, September.
    23. repec:nrb:wpaper:nrbwp172013 is not listed on IDEAS
    24. Tomola Marshal Obamuyi & J. Adeniyi Demehin, 2012. "Interest Rate Reforms And Financial Deepening In Nigeria," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 6(2), pages 81-90.
    25. Abdul Abiad & Ashoka Mody, 2005. "Financial Reform: What Shakes It? What Shapes It?," American Economic Review, American Economic Association, vol. 95(1), pages 66-88, March.
    26. T. Gries & M. Redlin, 2020. "Trade and economic development: global causality and development- and openness-related heterogeneity," International Economics and Economic Policy, Springer, vol. 17(4), pages 923-944, October.
    27. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-1072, June.
    28. Johansen, Soren, 1992. "Cointegration in partial systems and the efficiency of single-equation analysis," Journal of Econometrics, Elsevier, vol. 52(3), pages 389-402, June.
    29. repec:imf:imfsdn:15/8 is not listed on IDEAS
    30. Ho, Chun-Yu & Huang, Shaoqing & Shi, Hao & Wu, Jun, 2018. "Financial deepening and innovation: The role of political institutions," World Development, Elsevier, vol. 109(C), pages 1-13.
    31. Christopoulos, Dimitris K. & Tsionas, Efthymios G., 2004. "Financial development and economic growth: evidence from panel unit root and cointegration tests," Journal of Development Economics, Elsevier, vol. 73(1), pages 55-74, February.
    32. Moyo, Clement & Le Roux, Pierre, 2018. "Interest rate reforms and economic growth: the savings and investment channel," MPRA Paper 85297, University Library of Munich, Germany.
    33. Oxana Afanasyeva & Dmitriy Korovin, 2020. "The impact of reserve requirements of central banks on macroeconomic indicators," Entrepreneurship and Sustainability Issues, VsI Entrepreneurship and Sustainability Center, vol. 8(1), pages 413-429, September.
    34. Alya May Rachmawati & Dwi Wulandari & Bagus Shandy Narmaditya, 2021. "Financial Deepening and Income Inequality in Indonesia," Global Business Review, International Management Institute, vol. 22(1), pages 57-68, February.
    35. Ms. Ratna Sahay & Mr. Martin Cihak & Mr. Papa M N'Diaye & Mr. Adolfo Barajas & Ms. Diana B Ayala Pena & Ran Bi & Miss Yuan Gao & Ms. Annette J Kyobe & Lam Nguyen & Christian Saborowski & Katsiaryna Sv, 2015. "Rethinking Financial Deepening: Stability and Growth in Emerging Markets," IMF Staff Discussion Notes 2015/008, International Monetary Fund.
    36. Ross Levine, 2001. "International Financial Liberalization and Economic Growth," Review of International Economics, Wiley Blackwell, vol. 9(4), pages 688-702, November.
    37. repec:bla:devpol:v:22:y:2004:i::p:287-307 is not listed on IDEAS
    38. Cogley, Timothy & Nason, James M., 1995. "Effects of the Hodrick-Prescott filter on trend and difference stationary time series Implications for business cycle research," Journal of Economic Dynamics and Control, Elsevier, vol. 19(1-2), pages 253-278.
    39. Abdullah Mohammed Almalki & Khaled Ibrahim Batayneh, 2015. "The relationship between inflation and financial development in Saudi Arabia," Journal of Developing Areas, Tennessee State University, College of Business, vol. 49(6), pages 321-332, Special I.
    40. Ratna Sahay & Martin Cihak & Papa M N'Diaye & Adolfo Barajas & Diana B Ayala Pena & Ran Bi & Yuan Gao & Annette J Kyobe & Lam Nguyen & Christian Saborowski & Katsiaryna Svirydzenka & Seyed Reza Yousef, 2015. "Rethinking Financial Deepening; Stability and Growth in Emerging Markets," IMF Staff Discussion Notes 15/08, International Monetary Fund.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Guglielmo Maria Caporale & Mohamad Husam Helmi, 2018. "Islamic banking, credit, and economic growth: Some empirical evidence," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 23(4), pages 456-477, October.
    2. Sulaiman, Saidu & Masih, Mansur, 2017. "Is liberalizing finance the game in town for Nigeria ?," MPRA Paper 95569, University Library of Munich, Germany.
    3. Niels Hermes & Robert Lensink, 2005. "Does Financial Liberalization Influence Saving, Investment and Economic Growth?: Evidence from 25 Emerging Market Economies, 1973-97," WIDER Working Paper Series RP2005-69, World Institute for Development Economic Research (UNU-WIDER).
    4. Campos, Julia & Ericsson, Neil R. & Hendry, David F., 1996. "Cointegration tests in the presence of structural breaks," Journal of Econometrics, Elsevier, vol. 70(1), pages 187-220, January.
    5. Phouphet Kyophilavong & Gazi Salah Uddin & Muhammad Shahbaz, 2016. "The Nexus between Financial Development and Economic Growth in Lao PDR," Global Business Review, International Management Institute, vol. 17(2), pages 303-317, April.
    6. Nasreen, Samia & Mahalik, Mantu Kumar & Shahbaz, Muhammad & Abbas, Qaisar, 2020. "How do financial globalization, institutions and economic growth impact financial sector development in European countries?," Research in International Business and Finance, Elsevier, vol. 54(C).
    7. Phouphet KYOPHILAVONG & Gazi Salah Uddin & Muhammad Shahbaz, 2014. "The Nexus Between Financial Development and Economic Growth in Laos," Working Papers 2014-447, Department of Research, Ipag Business School.
    8. Gritli, Mohamed Ilyes & Rey, Serge, 2019. "Compte capital et développement financier en Tunisie : Causalité et relation de long terme," L'Actualité Economique, Société Canadienne de Science Economique, vol. 95(4), pages 405-428, Décembre.
    9. Gries, Thomas & Kraft, Manfred & Meierrieks, Daniel, 2009. "Linkages Between Financial Deepening, Trade Openness, and Economic Development: Causality Evidence from Sub-Saharan Africa," World Development, Elsevier, vol. 37(12), pages 1849-1860, December.
    10. Anupam Das & Syeed Khan, 2016. "Financial Development and Output: A Synthesis of Time Series Cointegration and Causality Tests for Bangladesh," South Asian Journal of Macroeconomics and Public Finance, , vol. 5(2), pages 113-132, December.
    11. Mr. Etibar Jafarov & Mr. Rodolfo Maino & Mr. Marco Pani, 2019. "Financial Repression is Knocking at the Door, Again," IMF Working Papers 2019/211, International Monetary Fund.
    12. Hasanov, Fakhri & Huseynov, Fariz, 2013. "Bank credits and non-oil economic growth: Evidence from Azerbaijan," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 597-610.
    13. Guangdong Xu & Binwei Gui, 2021. "The non‐linearity between finance and economic growth: a literature review and evidence from China," Asian-Pacific Economic Literature, The Crawford School, The Australian National University, vol. 35(1), pages 3-18, May.
    14. M. T. Alguacil & V. Orts, 2003. "Inward Foreign Direct Investment and Imports in Spain," International Economic Journal, Taylor & Francis Journals, vol. 17(3), pages 19-38.
    15. Murthy, N. R. Vasudeva & Phillips, Joseph M., 1996. "The relationship between budget deficits and capital inflows: Further econometric evidence," The Quarterly Review of Economics and Finance, Elsevier, vol. 36(4), pages 485-494.
    16. Alexander Schätz, 2010. "Macroeconomic Effects on Emerging Market Sector Indices," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 9(2), pages 131-169, August.
    17. Esther Stroe-Kunold & Joachim Werner, 2009. "A drunk and her dog: a spurious relation? Cointegration tests as instruments to detect spurious correlations between integrated time series," Quality & Quantity: International Journal of Methodology, Springer, vol. 43(6), pages 913-940, November.
    18. Ali, Amjad & Ur Rehman, Hafeez, 2015. "Macroeconomic Instability and Its Impact on Gross Domestic Product: An Empirical Analysis of Pakistan," MPRA Paper 71037, University Library of Munich, Germany.
    19. Chu, Kam Hon, 2010. "Bank mergers, branch networks and economic growth: Theory and evidence from Canada, 1889-1926," Journal of Macroeconomics, Elsevier, vol. 32(1), pages 265-283, March.
    20. Enowbi Batuo, Michael & Mlambo, Kupukile, 2012. "Financial liberalisation, Banking Crises and Economic Growth in African Countries," MPRA Paper 41524, University Library of Munich, Germany.

    More about this item

    Keywords

    Liberalization; deepening; reforms; interest rate; saving investment.;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ers:ijfirm:v:12:y:2022:i:3:p:3-22. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Marios Agiomavritis (email available below). General contact details of provider: https://journalfirm.com/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.