This study presents several methods of implementing the liberalization of interest rates, and reviews the positive impact and side effects expected from each method, identifying the optimal process of interest rate liberalization.
Discussions on the liberalization of interest rates are focused on determination of the rate and procedures of the method of liberalization. However, it is more important for the success of the method to improve the perceptions and behaviors of economic actors.
Liberalization of interest rates and deregulation are microeconomic strategies. It is important to perceive them as a shift from the artificial financial order, based on regulation, to a new financial system in which market price mechanisms play a central role. Such a shift means that government authorities will abandon their unilateral and regulation-oriented practice of managing policies, while paying the cost for implementing policies based on a market mechanism.
It also means that banks will partially exert their influence on a macroeconomic scale, which until recently was relegated to government only. For companies, the new financial system means that they have to bear the normal costs of financing, but also take into consideration uncertainties arising from fluctuating interest rates when engaging in economic activities. Therefore, if not accompanied by changes in perceptions and behaviors, the path towards the liberalization of interest rates will inevitably contain challenges. The resulting unpredictability in the financial market is likely to undermine the overall performance of national economy.
The government, in particular, needs to make efforts to achieve a consensus from the public and private sectors in fields such as improving the management of financial policies, and securing trust in financial policies from financial institutions and companies. When it comes to developing an agreement with the private sector, the government is required to present the mid-term goals, methods, and directions for policy management to the public, and comply with them. This should be done instead of relying on the existing practice of controlling interest rates and money supply through so-called “window guidance”. When it comes to issues outside the scope of the government measures, the government should try not to intervene in minor issues, and the private sector should resolve those issues by itself. Such practices would be appropriate under the new financial system followed by the liberalization of interest rates. Thus, financial policies need to be improved as follows:
First, it is necessary to improve the methods of financial policy management in a way that helps achieve compatibility between a new financial system and financial policies. Second, the government needs to communicate their financial policy’s methods and directions, even if it no longer controls interest rates(otherwise, the liberalization of interest rates is likely to further destabilize the financial market). Third, it should be accepted that the effect and scope of the government’s control over real economic variables will be limited.
금리자유화의 과제와 정책방향(Challenges and policy directions for liberalization of interest rates)
서울 : 한국개발연구원
|Series Title; No||연구보고 / 91-03|
|Subject Country||South Korea(Asia and Pacific)|
|Subject||Economy < Financial Policy|
|Holding||KDI; KDI School|