Interest Rate Deregulation: A Brief Survey of the Policy Issues and the Asian Experience

Abstract

It is generally recognized that controlled interest rates distort resource allocation and diminish the economy's capability to generate financial resources needed to promote further economic growth and development. It also leads to macroeconomic instability as the curtailed potential for generating the required financial funds is usually compensated by the central bank through an increase in its liabilities. With these generalizations in mind, it must be emphasized that the financial reform itself is no panacea to the obstacles hindering further development. Nonetheless, no country has escaped underdevelopment without taking direct and specific actions to reform and to strengthen the intermediary role of the financial sector. Moreover, no industrializing economy would be able to function without a financial sector in which a basic price— such as the interest rate—does not respond in one way or another to market forces. It can also be argued, and data corroborates the fact, that the greater the financial repression and the less responsive is the interest rate to market forces, the greater the need for a country to seek external aid, as domestic savings mobilization is inadequate to maintain a stable and sustained growth path.