Financial markets disparities in developed and developing countries

Abstract

Financial markets are important in the process of economic growth and development in their role in savings mobilization. Despite the limited range of financial assets available to savers in developing nations, monetarization ratios are generally lower for such countries than for developed countries. The menu of assets available to private savers in developing countries from the formal financial system is often limited to cash, demand deposits, time deposits and sometimes government securities. Thepaper utilizes granger causality, unit root tests and Ordinary Least squaresregression to estimate the relevance of monetarization of the economy. Evidence from statistical data shows that causality exists from growth of GDP to monetarization of the economy, which was the main objective of this study. The unit root test reveals that growth of GDP is stationary at levels whereas Monetarization ratios are stationary atfirst difference. Theresults are consistent with economic theory. The major recommendation is that the government should reduce the restrictions on banks, especially the reserve ratio. This will allow banks to create more credit, and with competition lending rates will reduce, hence increased investments.