Syria faces two interrelated medium-term challenges posed by the prospective decline in its oil reserves. The recently approved five-year plan (FYP) laid down a comprehensive strategy to address these challenges. Syria’s public finances are headed for challenging times in the coming 10–15 years. Large fiscal deficits have marked the economic history of many developed and developing countries alike during the 1970s and 1980s, with damaging consequences to their economies. Although financial markets can help keep the deficit bias in check, market discipline has proved mostly inadequate.
This paper examines the implications of inflation persistence for the inverted Fisher hypothesis that nominal interest rates do not adjust to inflation because of a high degree of substitutability between money and bonds. It is emphasized that the substitutability between nominal assets and capital renders the hypothesis inconsistent with the data when inflation persistence is high. Using a switching regression model, the analysis allows the reflection of inflation in interest rates to vary according to the degree of inflation persistence or forecastability. The hypothesis is supported by U.S. data only when inflation forecastability is below a certain threshold.
In recent years, the appropriate level and structure of interest tates have come to be seen as major issues in connection with stabilization programs undertaken by members. These issues arise from consideration both on the demand side, as interest rates affect the magnitude of aggregate demand, and on the supply side, as they influence the volume and quality of investment and, thus, the growth of output.
CENTRAL BANKS or other monetary authorities have at their disposal both general and specific instruments for controlling credit either by affecting its price (discount rate) or by changing its quantity.1 Open market operations and reserve ratios are general and quantitative measures; discount rates are also general but work through prices (interest rates). However, when central banks wish to influence not only the total volume of credit available but also its specific distribution among users, they may exercise selective controls by making quantitative credit allocations or by charging differential rates to various groups of banks or to individual banks.
This paper focuses on private capital movements and exchange rates in developing countries. The paper also highlights some implications of the analysis about the broader question of the effect of alternative exchange rate systems on capital flows. Capital movements respond to many factors which affect the yields expected by investors. Some of these, such as changes in the structure of the economy of the investee country, discoveries of mineral deposits, changes in exchange control or tax systems, the passage of investment laws, the amount of—and experience with—previous investments in the country, and, not least, the country's potential for economic growth, are very likely to play a more dominant role in the investment decision than expectations of changes in prices or exchange rates. The expectation of changes in the foreign exchange rate and in domestic prices and costs influences private capital movements, other things being equal, by altering the expected rate of return on assets which foreign investors may hold in the investee country.
This paper describes the operations of the international monetary system and to evaluate its efficacy to meet existing and foreseeable problems. The attempt is made to put the essential characteristics of the entire monetary system in a realistic perspective and to lay a better basis for studying and evaluating problems importantly affected by the operations of the system. Thus, the present international payments system is a deliberate choice among the means of conducting international financial relations. It is not rigid, and it makes provision for both adapting to enduring changes and meeting sudden and grave financial crises. However, the system has two permanent features—the use of par values and the convertibility of currencies for current transactions; without these features, it would cease to exist. The measures taken will be dealt with in a subsequent article on the management of the convertibility system and the techniques available for its defense.
In recent years, the appropriate level and structure of interest rates have come to be seen as major issues in connection with stabilization programs undertaken by members. These issues arise from consideration both on the demand side, as interest rates affect the magnitude of aggregate demand, and on the supply side, as they influence the volume and quality of investment and, thus, the growth of output. Attention has also been drawn to interest rate issues by the success achieved in certain countries carrying out programs of financial reform involving adjustment of interest rates.
In any economy in which decisions by individual economic units play a major role, interest rates perform several important functions in which they influence a broad range of economic decisions and outcomes. In this respect, interest rates are similar in scope to the influence of other economywide prices, such as the exchange rate and the basic wage rate.2
Interest rates can have a substantial influence on the rate and pattern of economic growth by influencing the volume and productivity of investment, as well as the volume and disposition of saving. This is especially true for countries where financial markets are relatively well developed or where private investment constitutes a significant share of total investment. Even in countries with less developed financial markets or in those where investment is overwhelmingly the responsibility of the public sector, interest rates may have a significant effect on the mobilization of household savings and on investment decisions. In analyzing this set of issues, it would be useful to distinguish between the effects on saving and those on investment, bearing in mind, however, that while the volume of new investment that can be undertaken is related to the amounts of both foreign borrowing and domestic saving out of current income, it is domestic saving that is by far the more important source of investment financing in most developing countries. Finally, both the savings and investment aspects of interest rate policies influence income distribution, which is treated in the last part of this section.
The bearing of interest rate policies on saving and investment decisions has been discussed in the previous section within the context of economic growth. Equally important is the effect of interest rate policies on macroeconomic stability. Although the primary impact of interest rates is on the financial sector, interest rates, like wages and exchange rates, also exert a substantial influence on aggregate output and employment, real investment, and other real economic aggregates.