Interest Rates, Credit Rationing, and Investment in Developing Countries
March 1, 2003
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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.
Subject: Bank credit, Credit, Currencies, Deposit rates, Financial institutions, Financial services, Loans, Money
Keywords: Bank credit, Credit, Currencies, deposit rate, Deposit rates, developing countries, expected return, institutions, interest rates, investment, investment equation, lending process, loan rate, Loans, rate of inflation, rates in a liberalized environment, representative bank, sound interest rate policy, WP
Pages:
31
Volume:
2003
DOI:
Issue:
063
Series:
Working Paper No. 2003/063
Stock No:
WPIEA0632003
ISBN:
9781451848441
ISSN:
1018-5941
