Testing the Validity of McKinnon-Shaw Hypothesis: Empirical Evidence from Nigeria

Ronald McKinnon [1] and Edward Shaw [2] explicate the notion of financial repression noting that Financial liberalization is meant to foster economic growth through increase in savings via an increase in real deposit rate and increase in private investment in high priority sectors, but how this policy has contributed to the growth of the Nigerian economy remains a lacuna. It is based on this that the study seeks to test the validity of McKinnon and Shaw Hypothesis Using Empirical evidence in Nigeria. The study employed annual time series data from 1981 to 2014 to provide response to the various determinant of Real Money Demand Balance in Nigeria, the Various determinant of Economic Growth as proxied by Gross Domestic Product in Nigeria with volatility in Financial Ratios and Various Determinant of Nigeria Investment Rate as a result of the capriciousness in Financial Ratios in Nigeria. Autoregressive Distributed lag model was used to analyze three regression models while conducting the Augmented Dickey Fuller, the Johansen Cointegration Test and Granger causal test. Of all financial ratios, It was observed that that interest rate has negligible, trifling or insignificant effect on Real Money balance, Investment Rate and Real Gross domestic Product in Nigeria at 95% level of Significance. Theoretical literature revealed that McKinnon-Shaw hypothesis have been seen to be valid in developed countries but its validity on Real Interest rate based on this findings when tested with empirical evidence is questionable in developing country like Nigeria owing to the undeveloped and unstructured financial system, policy inconsistency and policy mortality hence it is recommended that Nigeria financial system be revamped for a more structured, organized and developed financial system to further enable financial inclusion of all economic agents.