Financial Depth – Financial Repression Linkage

The impact of financial repression on financial depth is one of important issues for monetary authorities. Hence, this study examines the empirical relationship between financial repression and financial depth based on McKinnon-Shaw hypothesis in two set of countries, Including 43 lower middle income and 33 upper middle income countries during 1990 to 2008. Real interest rate and reserve ratio is used to measures financial repression and the method that is used in empirical analysis is Dynamic Panel Data (DPD) technique. The results show that reserve requirement and inflation have the negative and significant effect on financial depth in two set of countries. Also, the results indicate that nominal interest rate and economic development positively affect the level of financial depth. Thus, financial repression is an obstacle to financial depth and increase in nominal interest rate and reduce reserve ratio and inflation is suggested to encourage financial depth in two set of countries.