Financial Liberalisation in Trinidad and Tobago

Abstract

This study analyses financial liberalisation in Trinidad and Tobago within the context of the McKinnon–Shaw model. The broad objective of this article is to empirically investigate the validity of both the McKinnon complementarity hypothesis and the Shaw debt intermediation model in relation to Trinidad and Tobago. These two models purport that persuasive government intervention and involvement in the financial system through the regulatory and supervisory network, particularly in controlling interest rates and allocation of credit, tend to distort financial markets. Therefore, by the removal of administrative controls on the assets portfolio and pricing behaviour of financial institutions, interest rates will rise to levels that will result not only in increased savings and loanable funds but also in a more efficient allocation of these funds, providing, in turn, stimuli for economic growth. Utilising the cointegration approach, the empirical analysis is conducted with annual data from 1970 to 2001. The empirical results support both the McKinnon complementarity hypothesis and the Shaw debt intermediation hypothesis in the long run. That is to say, real interest rates have a significant influence on savings in the long run. However, the results indicate that the real interest rate plays an insignificant role in the Error Correction Model in the short run for both the McKinnon and Shaw theories. Hence, this article provides empirical validity for the McKinnon–Shaw financial liberalisation theory in Trinidad and Tobago over the long run. Thus policy makers should take explicit account of this result in the formulation of financial policy. The sustainability of this policy, however, depends on the appropriateness of other fiscal, monetary incomes and exchange rate policies.