Aspects of the Debate on Interest Rate Policies in Developing Countries

Abstract

ABSTRACT A decade of thinking about the role of money and monetary policy in developing countries has seen financial liberalization emerge as the new conventional wisdom in the development literature. It has made the eradication of financial “repression”, through the pursuit of positive real interest rate policies, a key macroeconomic objective in a wide range of developing countries. After taking a brief look at the main theoretical arguments of financial liberalization, this paper questions the centrality of the high interest rate paradigm by addressing what appear as some of the most contentious issues in the debate over high interest rate policies, namely their impact on savings, investment and resource allocation, the problem of choosing the appropriate interest rate schedule, the contractionary effects of tight credit policies, as well as the impact of financial liberalization on credit market dualism.