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Equilibrium interest rates and financial liberalisation in developing countries

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  • Roland Clarke

Abstract

It is a central argument of the financial repression literature that interest rates should be determined by the market to reflect the true cost of capital. This article suggests that the notion of an ‘equilibrium interest rate’ may be undefined since the rate required to balance financial markets differs from that required to equilibrate savings and investment. Thus liberalisation introduces an intrinsic instability into the financial system as a result of portfolio adjustment. The article examines the Chilean and Korean experiences and concludes that a sustainable reform requires positive but low real interest rates and broad regulation of the financial system to ensure macroeconomic stability.

Suggested Citation

  • Roland Clarke, 1996. "Equilibrium interest rates and financial liberalisation in developing countries," Journal of Development Studies, Taylor & Francis Journals, vol. 32(3), pages 391-413.
    • Handle: RePEc:taf:jdevst:v:32:y:1996:i:3:p:391-413
    DOI: 10.1080/00220389608422421
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    References listed on IDEAS

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    1. R McKinnon, 1991. "Financial Control in the Transition to a Market Economy," CEP Discussion Papers dp0040, Centre for Economic Performance, LSE.
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    Cited by:

    1. Muhammad Arshad Khan & Abdul Qayyum, 2007. "Trade Liberalisation, Financial Development and Economic Growth," Trade Working Papers 22204, East Asian Bureau of Economic Research.
    2. Ndanshau, Michael O. A. & Kilindo, Ali A. L., 2012. "Interest Rates and Financial Savings in Tanzania: 1967 - 2010," MPRA Paper 44387, University Library of Munich, Germany, revised Jan 2013.
    3. Paul Auerbach & Jalal Uddin Siddiki, 2004. "Financial Liberalisation and Economic Development: An Assessment," Journal of Economic Surveys, Wiley Blackwell, vol. 18(3), pages 231-265, July.

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