Interest Rate Controls, Capital Flow Restrictions, and Other Potentially Costly Financial Market Regulatory Tools
IMF Blog, February 6, 2020
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Bibliographic details
- Authors: Etibar Jafarov, Rodolfo Maino, Marco Pani
- Published: February 6, 2020
Context and scope
- Financial repression — administrative restrictions on interest rates, credit allocation, capital movements, and other financial operations — has reappeared on the policy agenda with the surge in public debt after the global financial crisis.
- The findings summarized derive from an IMF staff working paper using an updated index of interest rate controls covering 90 countries over 45 years.
Quantified growth impact
- Key estimate: Interest rate restrictions (a form of financial repression) could reduce real per capita growth by about 0.4–0.7 percentage points, on average.
- The adverse effect is larger in countries with larger financial systems.
Mechanisms of harm
- Distorting market incentives and signals, financial repression induces losses from inefficiency and rent-seeking that are not easily quantified.
- Rent-seeking and inefficiency can arise when administrative restrictions:
- reduce access to certain financial services (such as credit) for some users while improving benefits (e.g., through low interest rates) for selected users at the expense of those excluded;
- generate wasteful competition among potential users seeking the favored benefits.
- Interest rate controls may also:
- disrupt financial stability;
- reduce access to financing for small enterprises.
Evidence from case studies
- Kenya (interest-rate controls introduced in 2016):
- Banks sharply reduced lending to micro-, small-, and medium-sized firms while shoring up corporate clients.
- Banks were incentivized to switch to short-term funding and loans, exacerbating financial soundness indicators.
- Bolivia (interest rate controls introduced in 2013, along with credit quotas):
- Rapid growth in credits to targeted sectors.
- Reduced bank profitability.
- Raised concerns among some analysts about asset quality and financial inclusion, despite broadly sound financial indicators in the current cycle.
Policy-relevant findings
- A full liberalization of interest rates is necessary to significantly increase growth.
- Changes in interest rate restrictions short of full liberalization have a limited impact.
Source: IMF Blog post by Etibar Jafarov, Rodolfo Maino, Marco Pani, February 6, 2020.