Abstract
ABSTRACT This paper empirically tests for Bangladesh the McKinnon-Shaw model of financial development. According to McKinnon, a basic complementarity exists between money and physical capital. That is, money balances and tangible investments are complements rather than substitutes. The McKinnon-Shaw model predicts that a high real interest rate policy will stimulate savings and investment and promote economic growth. This view stands in sharp contrast with the neostructuralist view which contends that lowering the interest rate will stimulate investment and economic growth. Results of the empirical tests, using annual data from 1973 to 1991, provide some support, albeit weak, for the McKinnon-Shaw hypothesis for Bangladesh.
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