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.