Interest Rates, Credit Rationing, and Investment in Developing Countries

Author/Editor:

Mwanza Nkusu

Publication Date:

March 1, 2003

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper examines the impact of interest rates and inflation on bank loans and investment within a framework that mimics the financial sectors prevailing in most low-income developing countries. The paper emphasizes the importance of treating the lending and deposit rates of interest as distinct parameters in investment equations. The spread between the two rates is indicative of default risk and has a negative impact on incremental loan amounts associated with higher lending rates, in particular in economies with flawed institutions. The model presented in the paper highlights the importance of promoting macroeconomic stability and upgrading institutions and informational infrastructure.

Series:

Working Paper No. 2003/063

Subject:

Bank credit Credit Currencies Deposit rates Financial institutions Financial services Loans Money

English

Publication Date:

March 1, 2003

ISBN/ISSN:

9781451848441/1018-5941

Stock No:

WPIEA0632003

Pages:

31

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