Interest Rate Policies in Developing Countries

International Monetary Fund

• Publisher: INTERNATIONAL MONETARY FUND
• Year: 1983
• ISBN:
  9781557751041

NONE

Contents

Prefatory Note
I.	Introduction
II.	Interest Rates and Interest Rate Policies: An Overview
III.	Interest Rate Policies and Economic Growth Interest Rate Policies and Savings Interest Rate Policies and Investment Volume of Investment Productivity of Investment Interest Rate Policies and Income Distribution
IV.	Interest Rate Policies and Demand Management Repressed Interest Rates and Economic Stability Interest Rate Reform and Stabilization Policies Short-Run Problems Arising from Interest Rate Reform
V.	Conclusions
APPENDICES
I.	Interest Rate and Financial Savings in Selected Developing Countries
II.	Interest Rate Repression and Reform: Recent Experience in Four Member Countries Argentina Brazil Korea Turkey
III.	Interest Rate Policies, Financial Growth, and Economic Growth: Some Cross-Section Evidence
Bibliography

TABLES
Section
II.	1.	Selected Developing Countries: Interest Rates and Inflation, June 1978-June 1981
Appendices
I.	2.	Selected Developing Countries: Interest Rates and Financial Savings. 1975–81
III.	3.	Selected Developing Countries: Growth of Real Financial Assets and Real GDP by Groups Distinguished by Interest Rate Policy, 1971–80
	4.	Summary of Estimated Regressions
CHARTS
Appendices
II.	1.	Argentina: Real Interest Rate and Growth of Time and Savings Deposits, 1971–81
	2.	Brazil: Real Interest Rate and Growth of Time and Savings Deposits. 1971–81
	3.	Korea: Real Interest Rate and Growth of Time and Savings Deposits, 1971–81
	4.	Turkey: Real Interest Rate and Growth of Time and Savings Deposits, 1971–81
III.	5.	Selected Developing Countries; Growth of Real GDP and Real Financial Assets, 1971–81
	6.	Selected Developing Countries: Growth of Real Financial Assets and Real GDP by Groups Distinguished by Interest Rate Policy, 1971–80

The following symbols have been used throughout this paper:

	...		to indicate that data are not available:
	—		to indicate that the figure is zero or less than half the final digit shown, or that the item does not exist;
	–		between years or months (e.g., 1979–81 or January-June) to indicate the years or months covered, including the beginning and ending years or months;
	/		between years (e.g., 1980/81) to indicate a crop or fiscal (financial) year.

“Billion” means a thousand million.

Minor discrepancies between constituent figures and totals are due to rounding.

Appendix I
Interest Rates and Financial Savings in Selected Developing Countries

In this appendix, selected financial data are presented in Table 2 for countries whose experience is mentioned in the paper. For each country, six time series are given: deposit interest rates, rate of inflation, rate of return on foreign currency, rate of change in “real” (i.e., deflated) time and savings deposits, rate of change in foreign exchange reserves measured in U.S. dollars, and rate of growth of real gross domestic product (GDP). The first three of these variables represent the returns on the three major assets discussed in the text as being available to savers in developing countries: domestic deposits, domestic inflation hedges, and assets denominated in foreign currency. It is expected, for reasons given in the paper, that the relationship among these returns should be reflected in changes in real time and savings deposits and in foreign exchange holdings of the authorities.

Table 2. Selected Developing Countries: Interest Rates and Financial Savings, 1975–81¹

(In percent)

Sources: International Monetary Fund. International Financial Statistics, and Fund staff estimates.

¹ Interest rate is based on the 12-month deposit rate. Rate of inflation is the 12-month percentage change in the consumer price index. Return on foreign curreney is the London Lurodnlln! rate plus the rate of depreciation of the exchange rate over 12 months. Foreign exchange reserves are evaluated in U.S. dollars. All rates of change are over the calendar year, except for GDP. which is the change between annual figures.

² Annualized 30-day deposit interest rate.

³ Rate of return on treasury bills. For more detail, see Chart 2, footnote 2.

⁴ Annualized 90-day deposit interest rate.

⁵ Figure includes a sharp deflation in the third quarter when price controls were enforced vigorously. Effective inflation was probably higher when parallel markets are taken into account.

⁶ Based on the exchange rate depreciation in the parallel market, which is the relevant market because of stringent capital controls. Estimates are taken from Pick's Currency Yearbook or provided by the Fund staff.

⁷ Data for 1975 are not available,

⁸ Series is of limited relevance because the level of reserves was near exhaustion throughout the period and balance of payments disequilibria were accommodated by short-term credits.

The data are from the Fund’s publication. International Financial Statistics, and from Fund staff estimates. “Deposits” are the total of time and savings deposits as defined in International Financial Statistics. Interest rates are taken from country reports by the Fund staff and an effort is made to use the most representative rate available. The inflation rate is measured by the consumer price index. Although this index is subject to serious measurement errors in some cases, it is, in principle, the most appropriate price indicator in the present context, as it is the one relevant for the public’s saving decisions; moreover, it is available for most countries.

Appendix II
Interest Rate Repression and Reform: Recent Experience in Four Member Countries

Notes

³⁴ Financial assets consist primarily of claims on the financial system (principally deposits) but also of certain other assets (principally treasury debt instruments).

³⁵ “Real” interest rates referred to here arc with respect to current rates of inflation. Whether these real interest rates were negative with respect to expected inflation is a difficult question and beyond the scope of this paper.

³⁶ Financial assets in Brazil consist of money and quasi-money. “compulsory” deposits in the banking system, “voluntary” deposits, and other “voluntary” assets. The “compulsory” and “voluntary” deposits arc related to regulations pertaining to the proceeds of foreign loans and other foreign transactions.

³⁷ This figure, like all reference to inflation in this appendix, refers to the consumer price index. The inflation rate commonly used in public discussions in Brazil is the “general price index of domestic supply,” which was 110 percent during 1980.

³⁸ Financial assets in Korea consist predominantly of deposits in financial institutions.

³⁹ Financial assets in Turkey consist predominantly of deposits in financial institutions.

Argentina

The experience of Argentina during the period 1974–81 illustrates some of the themes of this paper: the effects of financial repression and the consequences of interest rate reform. The drastic changes in policies that took place in 1976 and 1977 allow an evaluation of alternative financial policies and their impact on financial stability.

Inflation started to accelerate in Argentina during the second half of 1974 and reached an annual rate of over 100 percent by the middle of 1975. Interest rates, however, lagged behind and became sharply negative in real terms. Despite an upward adjustment in interest rates in June 1975, the interest rate on savings deposits was still only 18 percent, substantially below the prevailing rate of inflation. Subsequent upward adjustments in nominal interest rates failed to prevent a continued decline in real interest rates throughout the remainder of 1975 and the first four months of 1976, owing to the acceleration of inflation. Rapid monetary expansion was accompanied by a decline in the real value of financial assets.³⁴ The stock of money and quasi-money declined by more than 50 percent between late 1974 and mid-1976, as strong inflationary expectations and the possibility of large currency depreciation caused the public to shift its monetary and quasi-monetary balances into real assets and foreign exchange. There was an especially sharp decline in real time and savings deposits, which fell by over 70 percent in 1975 (Chart 1). The share of time and savings deposits in broad money fell from about 50 percent at the end of 1974 to about 20 percent by mid-1976. In addition to these adverse financial developments, the balance of payments deteriorated and recorded a very large deficit in 1975, with foreign exchange reserves falling by 75 percent.

Chart 1. Argentina: Real Interest Rate and Growth of Time and Savings Deposits, 1971–81

(In percent)

Sources: International Monetary Fund. International Financial Statistics, and Fund staff estimates.

¹Nominal deposits, corrected for changes in the consumer price index (CPI).

²For 1973 and 1974, the 45–90 day deposit rate is shown. From June 1976 to May 1977. the rate on 30-day treasury bills is shown; subsequently, it is the commercial bank rate on 30-day deposits. For 1971. 1972, 1975, and from January to June 1976, no comparable rales are available. All rates are corrected for changes in the CPI.

³Measured as the sum of monetary and quasi-monetary deposits with the banking sector.

Starting in mid-1976 the authorities adopted a series of measures to combat inflation and to liberalize foreign trade and financial markets. As a result of these measures, the public’s demand for financial assets increased and caught up with the rate of credit expansion by the end of the year. The recovery in the public’s willingness to hold fin...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• Prefatory Note
• I. Introduction
• II. Interest Rates and Interest Rate Policies: An Overview
• III. Interest Rate Policies and Economic Growth
• IV. Interest Rate Policies and Demand Management
• V. Conclusions
• Appendices
• Footnotes