Changes In Real Interest Rates Research Articles

An Analytical Approach to Interest Rate Determination in Developing Countries

The role of interest rates in the development process has been studied extensively in recent years. Following upon the seminal work of McKinnon (1973), there have been a number of theoretical and empirical studies examining the relationship between financial development and economic growth, the effect of changes in real interest rates on savings and investment, and more generally, the pros and cons of a market-oriented financial system.1 Broadly speaking, there is now ample empirical evidence supporting the original claim by McKinnon [10] that there is a positive association between the degree of development of the financial sector, resulting primarily from a freer structure of interest rates, and the overall economic performance of developing countries.

The adverse supply-side effects of high interest rates and procyclical real wage movements

Despite widespread recognition that high interest rates may cause price increases through their influence on costs, this point has not been incorporated into simple aggregative macro models. We suggest a way of modifying the simple macro model to incorporate this effect, and by using reasonable parameter estimates, conclude that the supply side seems at least as responsive as the demand side to changes in real interest rates. An additional advantage of the amendment suggested in this note is that it is able to explain both procyclical and countercyclical movements in real wages.

BALANCE OF PAYMENTS DISTURBANCES AND THE DEBT OF THE NON-OIL LESS DEVELOPED COUNTRIES: RETROSPECT AND PROSPECT

The paper identifies the disturbances in the balance of payments of the non-oil less developed countries responsible for the rapid growth in their external debt between 1972 and 1977. It also examines prospects for the future. It finds that the sharp growth in the current account deficits in the years 1974 and 1975 was due primarily to adverse movements in the terms of trade. But trade terms were reversed in 1976 and 1977 and the deficit was reduced. Still overall inflation, slow export growth, and large interest payments kept the deficit substantially above the 1972 and earlier levels. In part II the paper examines how the debt to GNP ratio of the LDC's could be affected by four factors: export growth, changes in real interest rates, terms of trade, and credit rationing. A model is developed which shows that certain combinations of the four factors could lead to rapid accumulation of debt relative to GNP.

Price Expectations and Interest Rates: Some Clarifying Comments: Comment

Proposition I Under Patinkin's assumptions on the money market [2, p. 491], assume that commodity demand responds only to changes in real interest rates (i.e., equal changes in nominal interest rates and the anticipated inflation rate, everything else held constant, will leave commodity demand unchanged). Then a reduced real demand for money (from an increase in the anticipated inflation rate) is accomodated exclusively by a shift in the excess demand function for bonds. Commodity market equilibrium at a fixed level of real output YO can be expressed, following Patinkin, as