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International Monetary Fund
Published Date:
October 1983
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    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, 1975–81

    (In percent)1

    Interest rate2...94.6135.4134.8117.679.6158.7
    Rate of inflation336.1347.4160.4169.9139.787.6131.3
    Return on foreign currency1,202.8376.0130.782.680.640.8323.8
    Real change in deposits–71.363.7111.910.537.91.1–10.0
    Change in foreign exchange reserves–74.9402.0118.357.589.0–28.4–51.4
    Real GDP growth–2.1–3.15.0–3.712.01.4–6.1
    Interest rate334.634.441.136.444.859.477.6
    Rate of inflation31.244.843.
    Return on foreign currency30.543.737.841.7127.676.1127.3
    Real change in deposits9.313.763.056.8–6.2–35.7
    Change in foreign exchange reserves–23.736.811.149.4–20.8–33.014.5
    Real GDP growth5.–3.5
    Interest rate46.
    Rate of inflation40.569.5103.6108.518.3587.8100.2
    Return on foreign currency6...7126.677.029,950.050.0...
    Real change in deposits–12.7–25.9–32.5–26.06.2–21.4–27.9
    Change in foreign exchange reserves65.0–31.859.279.84.3–32.6–24.7
    Real GDP growth–12.4––8.4
    Interest rate8.
    Rate of inflation15.
    Return on foreign currency7.05.66.0102.717.714.416.5
    Real change in deposits2.0– 1.5–4.7–21.80.0–5.630.1
    Change in foreign exchange reserves8–34.0–73.736.616.230.241.736.6
    Real GDP growth–0.6–6.1–1.7–0.4–1.5–5.42.0
    Interest rate15.015.516.016.718 622.819.3
    Rate of inflation25.410.511.016.421.234.512.6
    Return on foreign currency7.
    Real change in deposits3.721.224.720.88.2–1.819.1
    Change in foreign exchange reserves181.9152.150.6–6.87.0–1.1–8.3
    Real GDP growth8.113.910.0l1.37.1–3.58.0
    Interest rate8.
    Rate of inflation1.
    Return on foreign currency19.73.4– 1.11 411.116.117.5
    Real change in deposits20.428.410.314.023.117,316.5
    Change in foreign exchange reserves–5.965.115.816.520.712.1–6.6
    Real GDP growth0.811.,06.5
    Interest rate9.
    Rate of inflation19.617.044.636.681.186.230.3
    Return on foreign currency15.916.123.741.236.8191.572.6
    Real change in deposits–1.4–9.3–22.7–5.54.415.8183.9
    Change in foreign exchange reserves–46.26.6–36.634.4–7.966.10.9
    Real GDP growth8.–0.4–1.14.4
    Sources: International Monetary Fund. International Financial Statistics, and Fund staff estimates.

    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


    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 financial assets reflected restoration of confidence in the peso as well as the increase in real interest rates resulting from reduction in the rate of inflation. During the second half of 1976, interest rate policy was aimed at increasing the real rates of interest to positive levels. Among the measures taken toward this end were the indexation of time deposits, the freeing of interest rates on bank acceptances, and the issuing of treasury bills to compete with the commercial banks for private sector funds. As a result of these measures, the commercial banks were forced to offer higher interest rates to attract deposits from the public, interest rates tended to become positive in real terms, and real private financial assets recovered strongly.

    The full liberalization of interest rates occurred in 1977. The level of real time and savings deposits more than doubled over the year, while the banking sector’s liabilities to the private sector grew considerably faster than credit, thus permitting a substantial buildup of net foreign assets. The increased flow of domestic resources to the banking system was caused by high domestic interest rates relative to those abroad, increased confidence in the peso, and increased competition among financial intermediaries. As a result of both the recovery of exports and increased capital inflows, the balance of payments had a large surplus in 1977. Foreign exchange reserves increased by almost 120 percent. The increase in capital inflows, however, soon became excessive and complicated the task of monetary management. In order to moderate the expansionary impact of capital inflows, the authorities were forced to undertake a series of measures, including a minimum maturity requirement on foreign loans, peso-denominated reserve requirements on private sector foreign borrowing, and, from May 12, 1978 to December 21, 1978, allowing the exchange rate to be determined by market forces. Nevertheless, the pattern of deposit growth and reserve accumulation continued through 1979.

    The financial situation began to deteriorate toward the end of 1979, with the exchange rate becoming seriously overvalued. Beginning in December 1978 and continuing until early in 1981, the peso was devalued in accordance with a preannounced schedule of rates. The schedule (tablita) of preannounced rates, together with interest rate increases, triggered large capital inflows attracted by high guaranteed rates of return in terms of foreign currency. As a result, there was a real appreciation of the peso, which led to a steady worsening of the current account from 1978 to 1980. As the portfolio reallocation process that led to the capital inflows came to an end and owing to a deteriorating fiscal situation, the hoped-for reduction in the rate of inflation failed to materialize, it became clear that the exchange rate was no longer viable. As a huge “catch-up” devaluation was expected imminently, the public began to shift back into foreign exchange. Interest rates rose substantially as funds drained from the banking system, leading to a combination of very high real interest rates and an erosion of bank deposits; in 1981 the real rate of interest was 12 percent.35 yet real deposits still fell by 10 percent. This experience points up the importance of accompanying market-determined or market-related interest rates with exchange rates that are consistent with underlying economic forces, in particular with the demand-management policies being carried out.


    Brazil maintained positive, or only moderately negative, real interest rates throughout most of the 1970s. The indexation of many financial instruments was a key element in preserving interest rates that generally stayed close to, if not always above, the rate of inflation. Correspondingly, there was a substantial increase in time and savings deposits, particularly during the 1976–78 period (Chart 2). The relative attractiveness of quasi-monetary assets led to a steady change in the composition of private sector holdings of financial assets,36 with the share of money declining and that of quasi-money increasing. Between 1975 and 1979, the share of quasi-monetary assets in private sector holdings of financial assets increased as a proportion of GDP from 12 to 18 percent. The rapid expansion of quasi-monetary assets was related to the liberalization of interest rates on time deposits paid by commercial and investment banks in 1975. Moreover, the exemption of time deposits from legal reserve requirements enabled the banks to offer relatively high interest rates on such deposits. Also, because these quasi-monetary assets were subject to at least partial monetary correction, they were particularly attractive in periods of high and accelerating inflation.

    Chart 2.Brazil: Real Interest Rate and Growth of Time and Savings Deposits, 1971–81

    (In percent)

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

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

    2Rate of return on treasury bonds, corrected for changes in the CPI. The value of these bonds is subject to an officially determined rate of monetary correction, which is added to an annual interest rate that averages 3.5 percent. This rate of return is approximately the same as that for savings deposits during the same quarter and changes in this rate parallel changes in rates on time deposits. Data on rates for time deposits are not available.

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

    In view of high domestic interest rates that were in excess of the cost of foreign borrowing, large capital inflows occurred, resulting in substantial reserve accumulation despite sizable current account deficits. Net foreign borrowing increased from US$3.7 billion in 1975 to US$8.4 billion in 1978. The increase in net capital inflows complicated the conduct of monetary policy. In an attempt to postpone the monetary effects of capital inflows, the authorities froze the proceeds of foreign borrowing in mid-1978 for a period of time that was originally 30 days but was subsequently increased to 150 days. This policy effectively raised the cost of foreign borrowing to a level comparable with that of domestic borrowing.

    Beginning in 1979 there was a significant shift in the interest rate policies of the authorities. In 1979 inflation accelerated rapidly to 76 percent, twice as high as in the previous year, while interest rates were raised only moderately. In September 1979 the authorities established ceilings on domestic interest rates, at 10 percent below the rates prevailing in August 1979. This measure, taken at a time of accelerating inflation, resulted in negative real interest rates. In 1980, in a further attempt to dampen inflationary expectations, the Government prefixed, at 50 percent, the indexation of financial assets. With the acceleration of inflation to 86 percent,37 substantial negative real interest rates resulted.

    The effects of this change in interest rate policy on financial intermediation were quite adverse. The acceleration of inflation produced a shift in the public’s preferences from assets with pre-established monetary correction to assets with a posteriori monetary correction. As real interest rates fell in 1979, time and savings deposits began to decline in real terms. In 1980, they fell even more sharply, with a decline in real terms of 36 percent. Low interest rates also had a negative impact on capital inflows. Domestic borrowers shunned foreign sources for the cheaper domestic lenders. The reduction in capital inflows, coupled with sharply higher current account deficits, led to large overall deficits and resulted in a heavy drain on foreign exchange reserves, which by the end of 1980 had eroded to about half of their 1978 level. Moreover, there was also a substantial decline in the private sector’s holdings of total financial assets, from 47 percent of GDP in 1978, to 37 percent in 1980. This reduction mainly reflected the diversion of funds into real estate, foreign exchange, and other nonfinancial assets in search of higher rates of return, as the banking system could not offer attractive interest rates to savers.


    Since carrying out an interest rate reform in 1965, the Korean authorities have pursued a flexible interest rate policy. Although interest rates have continued to be administered after the reform, the authorities have generally been responsive to variations in the rate of inflation and have sought to maintain interest rates that were positive in real terms. As a result of these policies, there has been a strong growth in the demand for financial assets;38 in particular, time and savings deposits have expanded rapidly whenever positive real interest rates have prevailed.

    In the wake of the interest rate reform of 1965, deposit interest rates were doubled from 15 percent to 30 percent and paved the way for an urgently needed mobilization of domestic savings. Initially, however, interest rates on genera) loans were set 4 percentage points lower than the deposit rates for comparable maturities, in order to reduce the interest costs of the enterprises. Following the initial surge in domestic savings, the authorities gradually reduced the interest rates in the latter half of the 1960s in response to the gradual decline in the rate of inflation. Because the downward adjustments in interest rates exceeded the deceleration of the inflation rate, real interest rates declined somewhat from their peak of about 20 percent in 1967 but remained positive through 1973, By 1973 interest rates on time and savings deposits and general loans were 12 percent and 15 percent, respeclively, while the rate of inflation was about 8 percent. Throughout this period (1966–73) the ratio of quasi-money to GDP increased steadily from 5 percent in 1966 to 22 percent in 1977, corresponding to a compound growth rate of about 15 percent per annum.

    This buildup of financial assets, however, was reversed quickly when the authorities allowed interest rates to become negative in real terms. Following the first round of oil price increases, inflation in Korea accelerated to an average of 25 percent, whereas interest rates were adjusted only inadequately. Moreover, the emergence of repressed interest rates was accompanied by uncertainties regarding the foreign exchange market, and a large devaluation in 1974 created another disincentive to investment in the domestic banking system. Time and savings deposits declined by 5 percent in 1974 (Chart 3) and in 1975, notwithstanding a moderate increase in real time and savings deposits, the ratio of quasi-money to GDP fell to 19 percent. At the initial stages of this two-year episode of interest rate repression. there was a shift in asset holders’ preferences away from domestic deposits to foreign exchange. This portfolio shift contributed to a massive decline in foreign exchange reserves in 1974. However, with the restoration of confidence in the won in 1975, reserves recovered strongly. In subsequent years repression of interest rates was eliminated and real interest rates became positive. Accordingly, the healthy growth of financial savings resumed once again and exceeded 20 percent in real terms in each of the years 1976–78.

    Chart 3.Korea: 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).

    2Twelve-month deposit rate, corrected for changes in the CPI.

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

    The second episode of negative real interest rates came in 1979–80. Like the first episode, it was associated with increases in oil prices. Following these increases, Korea experienced a rapid acceleration of inflation, which led to negative real interest rates despite some upward adjustments in the nominal rates. With interest rates falling in real terms, the growth of real deposits decelerated sharply in 1979 and became negative in 1980. Reserves fell slightly as well, partly because of the re-emergence of exchange market uncertainties.


    The experience of Turkey prior to 1980 also illustrates some of the effects of financial repression. Throughout the 1970s, nominal interest rates were subject to ceilings and were kept below the prevailing rates of inflation. The degree of financial repression was moderate during the first half of the decade, but intensified significantly in the latter half, particularly in 1978 and 1979. The demand for domestic financial assets39 generally declined in response to financial repression. The ratio of time and savings deposits to GDP fell every year between 1973 and 1978. Similarly, the rate of increase in the real value of time and savings deposits declined from 27 percent in 1972 to about 8 percent in 1973 and 1 percent in 1974 (Chart 4). In 1975, time and savings deposits started to decline in real terms and continued to decline at an accelerating rate through 1978, In 1979 authorities raised interest rate ceilings by 2 to 14 percent, and time and savings deposits increased by about 9 percent, owing partly to the change in interest rates and partly to other economic stabilization measures adopted during the year. These developments, however, were quickly reversed and the demand for financial assets started to decline once again, until the third quarter of 1980, when interest rates were liberalized.

    Chart 4.Real Interest Rate and Growth of Time and Savings Deposits, 1971–81

    (In percent)

    Sources: International Monetary Fund, International Financial Statistics; Central Bank of Turkey. Quarterly Bulletin: and Fund staff estimates.

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

    2Twelve-month deposit rate, corrected for changes in the CPI.

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

    Under financial repression, there was also a steady erosion of net capital inflows. Capital flight accelerated with the intensification of financial repression in 1978 and 1979. Apart from highly negative real interest rates, the political situation and uncertainties regarding future developments also were important factors in the deterioration of the capital account. Net capital inflows declined from US$1.5 billion in 1977 to US$0.7 billion in 1979. The cumulative decline was due primarily to a reduction of about US$1 billion in credits supplied by foreign commercial banks. This decline in net capital inflows necessitated a sharp curtailment of essential imports. In 1979 imports in nominal terms were 13 percent below their 1977 level, a decline of 35 percent in real terms.

    Intensification of financial repression in 1978 and 1979 led to further distortions in the allocation of resources. Financial funds were rapidly withdrawn from the banking system and were channeled into real assets, foreign exchange, and unorganized financial markets. Highly negative real interest rates, coupled with reduced confidence in the Turkish lira, made it increasingly difficult for the Government to attract workers’ remittances.

    In an effort to reduce the distortions stemming from negative interest rates, the Government liberalized interest rates in July 1980. The initial rise in interest rates, although substantial, was less than anticipated, given the prevailing rate of inflation. This development is explained by the domination of the financial system by a small number of large banks, which reached a “gentleman’s agreement” that deposit rates be raised by just over 10 percentage points for maturities in excess of one year. Nevertheless, competitive pressures from the growing number of nonbank financial intermediaries, as well as from the smaller banks, began to erode the “gentleman’s agreement.” At the same time, inflation began to decelerate, with the result that in 1981 interest rates became strongly favorable in real terms. The one-year deposit rate rose to 50 percent by February 1981, while inflation for 1981 was only about 30 percent.

    Following the liberalization of interest rates, funds started to flow back into the banking system. Time and savings deposits increased by about 29 percent in real terms during the quarter immediately following the liberalization. The flow of funds into the banking sector continued at an accelerated pace during the last quarter of 1980, as well as throughout 1981. During 1981, the growth in real time and savings deposits averaged about 30 percent a quarter, and by the end of the year they had almost tripled compared with the previous year. Concomitant with the strong recovery of the demand for time and savings deposits, the share of quasi-monetary assets in broad money rose sharply following the liberalization of interest rates.


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

    “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.

    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.

    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.

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

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

    Appendix III Interest Rate Policies, Financial Growth, and Economic Growth: Some Cross-Section Evidence

    It is clear from the examples cited in Appendix II that a change in interest rate policies can have a quite dramatic impact on the rate of accumulation of financial assets. But the crucial issue of whether this affects income growth was only hinted at in the above country studies. In this appendix some cross-section evidence bearing on this issue is studied. The basic data consists of the growth of real financial assets and real income for the decade 1971 to 1980 for 21 countries (chosen on the basis of data availability), together with a classification of their interest rates.40 This data is presented in Table 3, where 21 countries are grouped on the basis of their interest rate policies. For each country, the compound real growth rate for broad money and GDP is given for the decade 1971–80. The countries in Group A are countries that for the decade 1971–80 largely pursued interest rate policies that compensated depositors for inflation. The countries in Group B did not maintain fully positive interest rates, but their rea! interest rates were not puni-tively negative. The countries in Group C had high inflation and severely inadequate deposit interest rates.

    Table 3.Selected Developing Countries: Growth of Real Financial Assets1 and Real GDP by Groups Distinguished by Interest Rate Policy, 1971–80(Compound growth rates, percent per annum)
    Financial AssetsGDP
    A. Countries with Positive Real Interest Rutes
    Sri Lanka10.14.7
    Singapore7 69.1
    B. Countries with Moderately Negative Real Interest Rates
    South Africa4.33.7
    C. Countries with Severely Negative Real Interest Rates
    Sources: International Monetary Fund, International Financial Statistics, and Fund staff estimates.

    As argued in the paper, it would be expected that a high rate of financial saving would have a positive impact on growth, as it fosters a higher volume and efficiency of investment. Chart 5, a scatter diagram of the growth of broad money and GDP, tends to confirm the predicted positive association. The correlation coefficient between the two series is 0.78. The regression of GDP growth on the growth rate of broad money is given on line 2 of Table 4. The coefficient of broad money is 0.39 and significantly different from zero at the 1 percent level. Nevertheless, this finding of positive association between the rate of growth of broad money and GDP is inconclusive because there may also be a causal relationship in the opposite direction: a higher rate of income growth may lead to a more rapid accumulation of wealth and thus of financial assets.

    Chart 5.Selected Developing Countries: Growth of Real GDP and Real Financial Assets,1 1971–81

    (In percent)

    Source: International Monetary Fund, International Financial Statistics.

    1Defined in Table 3.

    Table 4.Summary of Estimated Regressions
    Independent Variables1
    Dependent VariableConstantR3M4Y5RM6RY7F-Statistic2R-Square
    Source: Fund staff estimates based on data presented in Table 3.

    It is possible that the main stimulus for economic growth originates in the external sector or is due to exogenous factors beyond the control of policymakers. With high rates of economic growth, the concomitant increase in savings can be expected to accelerate the rate of growth of real financial assets, provided that the prevailing financial environment in general and real interest rates in particular do not adversely affect the flow of savings into financial assets. Under the assumption that GDP growth is exogenous with respect to the growth of real financial assets, causation runs from the former to the latter and the regression with GDP growth as the independent variable is given on line 5 of Table 4.

    It may be possible, however, to demonstrate that high rates of growth of both financial assets and output are associated with positive real interest rate policies. Presumably, interest rate policies are exogenous—there is very little feedback from income growth to the policymaker’s determination of interest rates for savers. A finding that real interest rates are correlated with both financial savings and output growth, therefore, tends to support the reasoning in Section III of this paper.

    To demonstrate conclusively that such a correlation exists would require extensive research, taking into account other possible influences on financial savings and output growth besides interest rate policies. Nevertheless, a preliminary and tentative approach to such a demonstration is attempted here. Chart 6 presents the growth rates of real financial assets and output as a function of interest rate policies. These scatter diagrams evidence the strong influence of interest rate policies on financial savings and output growth. Countries where real interest rates were positive, experienced significantly higher growth of both financial assets and output compared with countries where real interest rates were substantially negative. In Chart 6, regressions of the growth rates of output and real financial assets on interest rate policies are also presented.41 The estimated regression coefficients are given on lines I and 4 of Table 4. Both of these regressions indicate that interest rate policies have a strong and statistically significant influence on financial savings and output growth performance. Although these results, admittedly, are tentative, they nevertheless lend support to the main line of reasoning in the paper.

    Chart 6.Selected Developing Countries; Growth of Real Financial Assets1 and Real GDP by Groups Distinguished by Interest Rate Policy,2 1971–80

    1As defined in Table 3.

    2See Table 3 for specification of these groups.

    The preceding analysis indicates that covariation between growth rates of real financial assets and output can be explained substantially in terms of differences in interest rate policies. The data supports the argument that positive interest rate policies stimulate output growth, and that this stimulus is transmitted mainly through the intermediation of financial asset accumulation.42Moreover, there is also some positive association between growth rates of real financial assets and output that is independent of interest rate policies. Line 3 of Table 4 gives the regression of output growth on interest rate policies and that part of broad money growth which is uncorrected with interest rate policies. The estimated coefficient of the latter variable is positive (0.36) and statistically significant. This finding suggests that there exists a strong association between output growth and growth of real financial assets, even when the effect of interest rate policies is neutralized, although, as before, the direction of causation cannot be determined.

    It is clear, however, that interest rate policies have a significant impact on financial deepening as measured by the difference between the rates of growth of real broad money and output. Results reported on line 7 of Table 4 show that in countries where positive real interest rates were maintained, the ratio of real broad money to GDP increased by 3.5 percent annually on average, whereas in countries with highly negative real rates the same ratio declined by 3.5 percent annually.

    The evidence presented here seems to give some tentative support to the view that, in the longer run, positive real interest rates contribute to the growth of output. Because of the correlation between the growth of output and financial savings, this evidence does not serve to explain the mechanism by which positive real interest rates stimulate economic growth. One possibility is that the principal effect of positive real interest rates is to raise the quality of investment, thereby increasing the growth rate of output and consequently that of financial savings. Another possibility is that the principal line of causation is, as suggested earlier, from interest rates to financial savings to growth of output. In either case, there does appear to be a relationship between interest rate policy and growth.43 Furthermore, although the data is consistent with alternative interpretations, there is no evidence that necessitates the dismissal of the main line of argument of this paper.


    The rate of growth of real financial assets is taken to be the growth of broad money in real terms. Other financial assets not included in broad money, such as securities, are typically unimportant in developing countries.

    Interest rate policies were quantified by assigning 1 to countries in Group A. 0 to countries in Group B, and -I to countries in Group C.

    It is possible to separate the total impact of interest rate policies on output growth into two components: the direct impact which is 0.29, and the impact through the response of financial asset accumulation which is 2.11. The two components add up to 2.40, which is the total impact given in line 1 of Table 4.

    Because of the administered nature of interest rales in these countries, a reversed direction of causation from either growth ot output or growth of financial savings to interest rates has been ruled out in this analysis.


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    Occasional Papers of the International Monetary Fund*

    2. Economic Stabilization and Growth in Portugal, by Hans O. Schmitt. 1981.

    5. Trade Policy Developments in Industrial Countries, by S.J. Anjaria, Z. Iqbal, L.L. Perez, and W.S. Tseng. 1981.

    6. The Multilateral System of Payments: Keynes, Convertibility, and the International Monetary Fund’s Articles of Agreement, by Joseph Gold. 1981.

    7. International Capital Markets: Recent Developments and Short-Term Prospects, 1981, by a Staff Team Headed by Richard C. Williams, with G.G. Johnson, 1981.

    8. Taxation in Sub-Saharan Africa. Part I: Tax Policy and Administration in Sub-Saharan Africa, by Carlos A. Aguirre, Peter S. Griffith, and M. Zühtü Yücelik. Part 11: A Statistical Evaluation of Taxation in Sub-Sahara Africa, by Tito Tanzi. 1981.

    9. World Economic Outlook: A Survey by the Staff of the International Monetary Fund. 1982.

    10. International Comparisons of Government Expenditure, by Alan A. Tait and Peter S. Heller. 1982.

    11. Payments Arrangements and the Expansion of Trade in Eastern and Southern Africa, by Shailendra J. Anjaria, Sena Eken, and John F. Laker. 1982.

    12. Effects of Slowdown in Industrial Countries on Growth in Non-Oil Developing Countries, by Morris Goldstein and Mohsin S. Khan. 1982.

    13. Currency Convertibility in the Economic Community of West African States, by John B. McLenaghan, Saleh M. Nsouli, and Klaus-Walter Riechel. 1982.

    14. International Capital Markets: Developments and Prospects, 1982, by a Staff Team Headed by Richard C. Williams, with G.G. Johnson. 1982.

    15. Hungary: An Economic Survey, by a Staff Team Headed by Patrick de Fontenay. 1982.

    16. Developments in International Trade Policy, by S.J. Anjaria, Z. Iqbal, N. Kirmani, and L.L. Perez. 1982.

    17. Aspects of the International Banking Safety Net, by G.G. Johnson, with Richard K. Abrams. 1983.

    18. Oil Exporters’ Economic Development in an Interdependent World, by Jahangir Amuzegar. 1983.

    19. The European Monetary System: The Experience, 1979–82, by Horst Ungerer. with Owen Evans and Peter Nyberg. 1983.

    20. Alternatives to the Central Bank in the Developing World, by Charles Collyns. 1983.

    22. Interest Rate Policies in Developing Countries: A Study by the Research Department of the International Monetary Fund. 1983.

    23. International Capital Markets: Developments and Prospects, 1983, by Richard Williams, Peter Keller, John Lipsky, and Donald Mathieson. 1983.

    24. Government Employment and Pay: Some International Comparisons, by Peter S. Heller and Alan A. Tait. 1983. Revised 1984.

    25. Recent Multilateral Debt Restructurings with Official and Bank Creditors, by a Staff Team Headed by E. Brau and R.C. Williams, with P.M. Keller and M. Nowak. 1983.

    26. The Fund, Commercial Banks, and Member Countries, by Paul Mentré. 1984.

    27. World Economic Outlook: A Survey by the Staff of the International Monetary Fund. 1984.

    28. Exchange Rate Volatility and World Trade: A Study by the Research Department of the International Monetary Fund. 1984.

    29. Issues in the Assessment of the Exchange Rates of Industrial Countries: A Study by the Research Department of the International Monetary Fund. 1984

    30. The Exchange Rate System—Lessons of the Past and Options for the Future: A Study by the Research Department of the International Monetary Fund. 1984

    31. International Capital Markets: Developments and Prospects, 1984, by Maxwell Watson. Peter Keller, and Donald Mathieson. 1984.

    32. World Economic Outlook, September 1984: Revised Projections by the Staff of the International Monetary Fund. 1984.

    33. Foreign Private Investment in Developing Countries: A Study by the Research Department of the International Monetary Fund. 1985.

    34. Adjustment Programs in Africa: The Recent Experience, by Justin B. Zulu and Saleh M. Nsouli. 1985.

    35. The West African Monetary Union: An Analytical Review, by Rattan J. Bhatia. 1985.

    36. Formulation of Exchange Rate Policies in Adjustment Programs, by a Staff Team Headed by G.G. Johnson. 1985.

    37. Export Credit Cover Policies and Payments Difficulties, by Eduard H. Brau and Chanpen Puckahtikom. 1985.

    38. Trade Policy Issues and Developments, by Shailendra J. Anjaria, Naheed Kirmani, and Arnc B. Petersen. 1985.

    39. A Case of Successful Adjustment: Korea’s Experience During 1980–84, by Bijan B. Aghevli and Jorge Márquez-Ruarte. 1985.

    40. Recent Developments in External Debt Restructuring, by K. Burke Dillon, C. Maxwell Watson. G, Russell Kincaid, and Chanpen Puckahtikom. 1985.

    41. Fund-Supported Adjustment Programs and Economic Growth, by Mohsin S. Khan and Malcolm D. Knight. 1985.

    42. Global Effects of Fund-Supported Adjustment Programs, by Morris Goldstein. 1986.

    43. International Capital Markets: Developments and Prospects, by Maxwell Watson, Donald Mathieson, Russell Kincaid, and Eliot Kalter. 1986.

    44. A Review of the Fiscal Impulse Measure, by Peter S. Heller. Richard D. Haas, and Ahsan H. Mansur. 1986.

    45. Switzerland’s Role as an International Financial Center, by Benedicte Vibe Christensen. 1986.

    46. Fund-Supported Programs, Fiscal Policy, and Income Distribution: A Study by the Fiscal Affairs Department of the International Monetary Fund. 1986.

    47. Aging and Social Expenditure in the Major Industrial Countries, 1980–2025, by Peter S. Heller Richard Hemming, Peter W. Kohnert. and a Staff Team from the Fiscal Affairs Department. 1986.

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    Numbers 1, 3, 4, and 21 of the Occasional Paper series are out of print.

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