Financial policies, growth, and efficiency

Abstract

Most developing countries intervene extensively in financial markets, setting ceilings on interest rates and spreads and allocating much (often between half and all) of formal credit to"priority"uses. This study reviews interest rate controls and other repressive financial policies on investment and efficiency, and investigates such relationships using a cross section analysis of 34 countries between 1965 and 1985. The report finds a significant positive correlation between growth and interest rates as well as between efficiency and interest rates. However, it finds little relationship between interest rates and investment levelsand no relationship between interest rates and the current account. The evidence found supports the need for liberalizing financial markets or at least supports measures against severe financial repression. That is not to say that abrupt liberalization is desirable or that certain interventions in financial markets may not be beneficial -- at least until measures to improve information, supervision, regulation, and macrostability have become effective.

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