MCKINNON-SHAW COMPLIMENTARITY HYPOTHESIS:
EVIDENCE FROM LESOTHO

 

Sephooko Motelle and Rethabile Masenyetse
Economics Society of Lesotho

 

ABSTRACT

A number of developing countries have implemented financial reforms as a mechanism towards improving the process of financial intermediation and ultimately economic growth. Lesotho has also implemented a series of reforms in the financial sector including interest rate liberalization and introduction of indirect instruments of monetary policy. The paper investigated the validity of McKinnon- Shaw complementarity hypothesis in Lesotho using the quarterly data covering 1990-2006. The hypothesis argues that there is a positive relationship between real money and physical capital. Using granger causality and error correction models (ECM), the study found empirical support for the complementarity hypothesis in Lesotho. Thus the ongoing financial reforms play an important role in enhancing fixed capital formation and economic growth.