An investigation into the nature and impact of financial repression in Trinidad and Tobago : 1960-1991

This research examines the nature and impact of financial repression in the Trinidad and Tobago economy using cointegration time series techniques and disequilibrium econometrics. While the former is employed to estimate the impact on savings, investment and growth, the latter is mainly used to test whether the characteristics which depict a financially repressed economy are present in Trinidad and Tobago. Trinidad and Tobago has not previously been the subject of such a study, and neither estimation methods have been used to investigate financial repression. While the real interest has been most frequently used to measure financial repression, six proxies are utilised in this study: the real interest rate; dummy variables; commercial banks' reserve requirement; inflation; the difference between the domestic and the foreign interest rate and a variable to measure the overvaluation of a country's currency. With respect to the latter there are two definitions: the difference between the official and the blackmarket exchange rate and the degree of exchange rate misalignment. The results using real interest rates and inflation measures of financial repression suggest that while liberalisation cannot be seen as the solution to increasing savings and investment it may promote economic growth. When all the other proxies are examined the impact of financial repression on the economy is negative albeit statistically insignificant in most instances. There is some indication that exchange rate should be devalued so as to reduce exchange rate misalignment and reduce the widening gap between the official and blackmarket rate. On the basis of these results the McKinnon-Shaw hypothesis cannot be rejected. However the results when inflation and real interest rates are the relevant proxies for financial repression as well as the low significance levels of other proxies, ought to serve as warning signals to avoid implementing drastic liberalisation measures too quickly.