Financial Liberalisation

The macroeconomic consequences of financial liberalisation is far from salutary. Critiquing the financial liberalisation thesis, we explore the existing theoretical and empirical literature to understand the nuances of financial flows and their implications for the determination of macroeconomic aggregates. We provide an analytical explanation of the positivity of the rate of interest in capitalistic economies. In an economy where the transformation to capitalism is incomplete, the relationship between agriculture and industry remains fundamental. The provision of credit is bound up with the distribution of income between classes. Banks can play a role in the production of commodities by means of labour. The analytical models are broadly corroborated by empirical findings. They provide rationale for often witnessed 'structural' credit constraint in many emerging economies. Expectations and animal spirits of firms matter for the utilisation of credit. The discussion provides a wayforward for understanding the financially-layered modern economy and to formulate appropriate macroeconomic policy.