The Mckinnon-Shaw Hypothesis: Thirty Years on: A Review of Recent Developments in Financial Liberalization Theory

The Mckinnon-Shaw Hypothesis, in its’ various forms, is now thirty years old. Over that period literally hundreds of empirical studies have been completed examining the hypothesis in many different contexts. Initially, the hypothesis focused on the effects of so-called “Financial Repression” (low or negative real interest rates) on savings and investment levels in developing countries. In more recent times, researchers have extended the debate to consider other effects of financial repression on: economic growth; financial crises and poverty (for example the effects of overvalued exchange rates). Currently, significant research is being conducted on the potentially destabilizing effects of financial liberalization (the converse of financial repression) on global financial markets.