Real Interest Rate Behaviour and Monetary Policy in Myanmar:Based on Financial Libralisation Hypothesis

Abstract

McKinnon’s complementarity hypothesis articulates that money and physical
capital complements each other instead of substituting under a repressed financial
sector. In spite of various economic and financial reforms in Myanmar, the
financial sector of Myanmar is lagging behind international standards. Thus, this
study is designed to test McKinnon’s complementarity hypothesis in case of
Myanmar. Time series studies has been analyzed for said purpose. This study not
only determines unit root problem but also tests unit root problem in presence of
structural break. Long run relationship is testified through bounds test in presence
of structural break. Long run and short run estimates are determined in order to
check McKinnon’s complementarity hypothesis in static and dynamic setting as
bounds testing approach distinguish feature is to provide static long run estimates
along with dynamic short run estimates. Moreover, this study applies innovative
accounting approach to determine strength of casual relationship between
variables of the study. Results of the study confirms McKinnon’s
complementarity hypothesis in long run and no evidence is found in case of short
run. Thus, it can be deduced that investment is restricted due to availability of
finance rather than cost of capital in Myanmar.

Keywords: McKinnon’s complementarity hypothesis; money; investment; bounds testing approach

JEL Classification: E22,E41,E50,G10