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Interest Rate Controls, Capital Flow Restrictions, and Other Potentially Costly Financial Market Regulatory Tools

Etibar Jafarov, Rodolfo Maino, Marco Pani

February 6, 2020

With the surge in public debt in the wake of the global financial crisis, financial repression—administrative restrictions on interest rates, credit allocation, capital movements, and other financial operations—has come back on the agenda.

In our recent working paper, we argue that countries would be better-off without financial repression.


Amount by which financial repression in the form of interest rate restrictions could reduce real per capita economic growth


By distorting market incentives and signals, financial repression induces losses from inefficiency and rent-seeking that are not easily quantified. Losses from rent-seeking might occur when administrative restrictions reduce access to certain financial services (such as credit) and improve the benefits (e.g., through low interest rates) for the selected users (at the cost of those excluded), and when these lead to wasteful competition among potential users for such gains.

Using an updated index of interest rate controls covering 90 countries over 45 years, this IMF staff study estimates that financial repression in the form of interest rate restrictions could reduce real per capita growth by about 0.4–0.7 percentage points, on average, with the effect being larger in countries with larger financial systems.

The study also finds that a full liberalization of interest rates is necessary to significantly increase growth, and changes in interest rate restrictions short of full liberalization have a limited impact.

The case studies suggest that interest rate controls may also disrupt financial stability and may reduce access to financing for small enterprises.

In Kenya, for example, banks reduced sharply their lending to micro-, small-, and medium-sized firms while shoring up their corporate clients in response to interest-rate controls introduced in 2016, and exacerbated financial soundness indicators by incentivizing banks to switch to short-term funding and loans.

In Bolivia, interest rate controls introduced in 2013, along with credit quotas, led to rapid growth in credits to the targeted sectors and reduced bank profitability, raising concerns by some analysts about asset quality and financial inclusion despite broadly sound financial indicators in the current cycle.