Banking Sector Controls and Financial Development

38 Pages Posted: 23 Apr 2010

See all articles by K. Gooroochurun

K. Gooroochurun

University of Mauritius - Law & Management

Boopen Seetanah

University of Mauritius

V. Sannasee

RMIT University

Date Written: April 23, 2010

Abstract

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.

Suggested Citation

Gooroochurun, K. and Seetanah, Boopen and Sannasee, V., Banking Sector Controls and Financial Development (April 23, 2010). Available at SSRN: https://ssrn.com/abstract=1594866 or http://dx.doi.org/10.2139/ssrn.1594866

K. Gooroochurun

University of Mauritius - Law & Management

Mauritius

Boopen Seetanah (Contact Author)

University of Mauritius ( email )

Reduit, 80837
Mauritius

V. Sannasee

RMIT University

124 La Trobe Street
Melbourne, 3000
Australia

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