{
  "title": "Interest Rate Controls, Capital Flow Restrictions, and Other Potentially Costly Financial Market Regulatory Tools",
  "publication": "IMF Blog, February 6, 2020",
  "sourceUrl": "https://www.imf.org/en/blogs/articles/2020/02/06/interestratecontrolscapitalflowrestrictionsandotherpotentiallycostlyfinancialmarketregulatorytools",
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  "summary": "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.",
  "sections": [
    {
      "heading": "Context and scope",
      "content": "- 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.\n- The findings summarized derive from an IMF staff working paper using an updated index of interest rate controls covering 90 countries over 45 years."
    },
    {
      "heading": "Quantified growth impact",
      "content": "- 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.\n- The adverse effect is larger in countries with larger financial systems."
    },
    {
      "heading": "Mechanisms of harm",
      "content": "- Distorting market incentives and signals, financial repression induces losses from inefficiency and rent-seeking that are not easily quantified.\n- Rent-seeking and inefficiency can arise when administrative restrictions:\n  - 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;\n  - generate wasteful competition among potential users seeking the favored benefits.\n- Interest rate controls may also:\n  - disrupt financial stability;\n  - reduce access to financing for small enterprises."
    },
    {
      "heading": "Evidence from case studies",
      "content": "- Kenya (interest-rate controls introduced in 2016):\n  - Banks sharply reduced lending to micro-, small-, and medium-sized firms while shoring up corporate clients.\n  - Banks were incentivized to switch to short-term funding and loans, exacerbating financial soundness indicators.\n- Bolivia (interest rate controls introduced in 2013, along with credit quotas):\n  - Rapid growth in credits to targeted sectors.\n  - Reduced bank profitability.\n  - Raised concerns among some analysts about asset quality and financial inclusion, despite broadly sound financial indicators in the current cycle."
    },
    {
      "heading": "Policy-relevant findings",
      "content": "- A full liberalization of interest rates is necessary to significantly increase growth.\n- Changes in interest rate restrictions short of full liberalization have a limited impact.\n\nSource: IMF Blog post by Etibar Jafarov, Rodolfo Maino, Marco Pani, February 6, 2020.\n\n---\n\n\n References\n\n- working paper\n\nSource: https://www.imf.org/en/blogs/articles/2020/02/06/interestratecontrolscapitalflowrestrictionsandotherpotentiallycostlyfinancialmarketregulatorytools"
    }
  ],
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    "Authors: Etibar Jafarov, Rodolfo Maino, Marco Pani",
    "Published: February 6, 2020",
    "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.",
    "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.",
    "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:",
    "Interest rate controls may also:",
    "Kenya (interest-rate controls introduced in 2016):",
    "Bolivia (interest rate controls introduced in 2013, along with credit quotas):",
    "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.",
    "[working paper](https://www.imf.org/en/Publications/WP/Issues/2019/09/30/Financial-Repression-is-Knocking-at-the-Door-Again-48641)"
  ],
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