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Interest rate management in developing countries : theory and simulation results for Korea (English)

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  • Interest rate management in developing countries : theory and simulation results for Korea (English)
  • van Wijnbergen, Sweder
  • World Bank (WB)


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Title Interest rate management in developing countries : theory and simulation results for Korea (English)
Similar Titles
Material Type Reports
Author(English)

van Wijnbergen, Sweder

Publisher

World Bank (WB)

Date 1983
ISBN 0-8213-0188-8
Language English
File Type Link
Subject Economy < Macroeconomics

Abstract

Much of the existing development literature follows McKinnon and Shaw in claiming that higher time deposit rates raise output and lower inflation in the short run and increase growth via their favorable impact on savings rates. This paper shows that this result depends crucially on the assumption that the portfolio shift into time deposits comes out of an unproductive asset, providing less intermediation than the banking system. If instead, time deposits are closer substitutes to assets providing more intermediation, such as loans outstanding on the curb market, raising time deposit rates is contractionary. The paper also discusses the impact of changes in time deposit rates on inflation, capital accumulation, and medium-term growth. A negative impact on investment and growth and positive effects on inflation in the short run are possible consequences of increased time deposit rates. The empirical relevance of all this is demonstrated by simulation runs with a quarterly macroeconomic model of South Korea.