Real Interest Rate Behaviour and Monetary Policy in Myanmar : Based on Financial Libralisation Hypothesis

McKinnon’s complementarity hypothesis articulates that money and physicalcapital complements each other instead of substituting under a repressed financialsector. In spite of various economic and financial reforms in Myanmar, thefinancial sector of Myanmar is lagging behind international standards. Thus, thisstudy is designed to test McKinnon’s complementarity hypothesis in case ofMyanmar. Time series studies has been analyzed for said purpose. This study notonly determines unit root problem but also tests unit root problem in presence ofstructural break. Long run relationship is testified through bounds test in presenceof structural break. Long run and short run estimates are determined in order tocheck McKinnon’s complementarity hypothesis in static and dynamic setting asbounds testing approach distinguish feature is to provide static long run estimatesalong with dynamic short run estimates. Moreover, this study applies innovativeaccounting approach to determine strength of casual relationship betweenvariables of the study. Results of the study confirms McKinnon’scomplementarity hypothesis in long run and no evidence is found in case of shortrun. Thus, it can be deduced that investment is restricted due to availability offinance rather than cost of capital in Myanmar