Abstract
This paper investigates (a) the validity of financial deepening paradigms in the context of Sri Lanka and (b) the effects of financial deepening on savings and investment that promote growth. In investigating financial deepening in Sri Lanka the paper uses three paradigms i.e., Keynesian, McKinnon-Shaw and neo-structuralist. After examining these three versions the paper argues that an improved model which combines both Keynesian and McKinnon-Shaw versions produces a model more successful in explaining the characteristics of financial deepening in Sri Lanka. The effects of financial deepening on savings and investment were studied using this improved model. Results show that there are several factors other than interest rate influencing financial deepening in Sri Lanka. The study confirms the neo-structuralists' hypothesis which claims that financial deepening has reduced provision of credit to the informal sector. The paper also evaluates the effects of policy changes introduced since 1977 on financial deepening in Sri Lanka. DOI: <a href="http://dx.doi.org/10.4038/ss.v33i1.1245">http://dx.doi.org/10.4038/ss.v33i1.1245</a> <em>Staff Studies </em>Volume 33 Numbers 1& 2 2003 p.15-32
Highlights
This paper investigates the validity of rival paradigms that claim to explain financial deepening in Sri Lanka during the period 1965.1-1997.4
In the McKinnon-Shaw paradigm, financial deepening occurs with high interest rates, credit expansion and removal or reduction in statutory reserve requirement (SRR)
The test results of the study showed that there is a positive relationship between these variables and financial deepening indicators and that of savings and investment in Sri Lanka
Summary
This paper investigates the validity of rival paradigms that claim to explain financial deepening in Sri Lanka during the period 1965.1-1997.4. In the McKinnon-Shaw paradigm, financial deepening occurs with high interest rates, credit expansion and removal or reduction in statutory reserve requirement (SRR). It advocates financial liberalization policies in order to achieve economic objectives, in the developing countries. Neostructuralists argue that in the presence of unorganized money markets (UMM), financial liberalization leads to a reduction in investment, as the credit available in the system declines. This decline in credit is a result of substitution of loans of the UMM for deposits in the organized market.
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
