Banking Sector Controls and Financial Development
38 Pages Posted: 23 Apr 2010
Date Written: April 23, 2010
Financial development has received considerable attention in past literature. This study brings to light financial deepening in an all new angle by introducing banking sector controls as its possible determinants and that, to be considered for the Mauritian experience. A VECM is initially formulated to capture the long run effect of the different banking policies used, followed by a dynamic ordinary least squares (DOLS) estimation to cater for unknown small sample properties of a VECM. Causality tests are applied to highlight the appropriateness of the different policies imposed following results of their direction of causality. The outcome of the different techniques used point out towards a positive and significant relationship of the different policies, formulated as an index by way of principal component analysis (PCA). Based on the DOLS estimator, the evidence on interest rate restraints points out to ambiguous long run effects on the different indicators for financial development. Cash reserve requirement proves to deepen the financial system while statutory liquidity requirement and directed credit programmes show a negative interaction with financial development. Mostly one-way short run causality seems to run from the individual controls to financial development but there is some evidence of reciprocity.
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