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Interest Rate Determination in Developing Countries: A Conceptual Framework (Détermination du taux d'intérêt dans les pays en développement: cadre théorique) (Determinación de los tipos de interés en los países en desarrollo: Un marco conceptual)

Contents:

Author Info

  • Sebastian Edwards

    (International Monetary Fund)

  • Mohsin S. Khan

    (International Monetary Fund)

Abstract

As some developing countries move toward more liberalized financial systems, policymakers in these countries face the question of how interest rates respond to foreign influences and domestic policies. Most existing studies of interest rates typically treat only the extreme cases, either of a fully open economy, in which some form of interest rate arbitrage holds, or of a completely closed economy, in which interest rates are determined solely by domestic monetary factors. Developing economies, however, in general fall somewhere between these two extremes, so that the standard models of interest rate determination would not seem to be relevant to them. The purpose of this paper is to outline a theoretical framework that can serve as a starting point for analyzing interest rate behavior in those developing countries that are in the process of removing controls on the financial sector and restrictions on capital flows. The approach suggested here combines elements of models developed for both closed and open economies; thus it is able to incorporate the influences on domestic interest rates of foreign interest rates, expected changes in exchange rates, and domestic monetary developments. An interesting feature of the model presented is that the approximate degree of financial openness, defined as the extent to which domestic interest rates are linked to foreign interest rates, can be determined from the data of the country analyzed. To illustrate the empirical validity of the proposed model, it was applied to two countries--Colombia and Singapore. These two countries are quite different in their degrees of financial development and openness, and thus they provide a useful first test of the general nature of the model. The model is able to represent both these cases quite adequately. The estimates indicate that in Colombia both foreign and domestic factors are important, whereas domestic interest rates in Singapore are fully determined by foreign interest rates and by variations in the exchange rate. These results are precisely those expected, given the characteristics of the respective financial systems in the two countries. /// Au moment où certains pays en développement se rapprochent de systèmes financiers plus libéraux, leurs dirigeants se préoccupent de la façon dont les taux d'intérêt réagissent aux influences extérieures et aux politiques intérieures. Dans la plupart des études consacrées aux taux d'intérêt, les auteurs ne traitent habituellement que les cas extrêmes: soit une économie pleinement ouverte, où la détermination des taux en question fait l'objet d'un arbitrage sous une forme ou sous une autre, soit, au contraire, une économie complètement fermée, où seuls les facteurs monétaires intérieurs les déterminent. Les économies en développement se situent cependant, en général, entre ces deux pôles, de sorte que les modèles types de détermination ne semblent pas leur être applicables. Les auteurs de la présente étude se sont donné pour tâche d'esquisser un cadre théorique susceptible de servir de base à l'analyse du comportement des taux d'intérêt dans les pays en développement où les autorités sont en train d'abolir les contrôles qu'elles exerçaient sur le secteur financier, ainsi que les restrictions en matière de mouvements de capitaux. La méthode qu'ils proposent associe les éléments de modèles élaborés aussi bien pour les économies fermées que pour les économies ouvertes; elle peut donc tenir compte des influences exercées sur les taux d'intérêt intérieurs par leurs contreparties extérieures, les variations prévues des taux de change et l'évolution monétaire intérieure. Le modèle présenté se distingue par une caractéristique intéressante: en se basant sur les données du pays analysé, on peut déterminer son degré d'ouverture financière approximative, défini comme la mesure dans laquelle les taux d'intérêt intérieurs sont liés à ceux du dehors. Pour montrer la validité empirique du modèle proposé, les auteurs l'ont appliqué à deux pays: la Colombie et Singapour. Comme ces deux pays se trouvent à des degrés de développement financier et d'ouverture tout à fait différents, ils fournissent un premier test utile de la nature générale du modèle, qui est capable de représenter ces deux cas de façon très satisfaisante. D'après les estimations, en Colombie les facteurs extérieurs et intérieurs sont, les uns comme les autres, importants, tandis qu'à Singapour les taux d'intérêt intérieurs sont entièrement déterminés par les taux de l'étranger et les variations du taux de change. Etant donné les particularités des systèmes financiers respectifs dans les deux pays, ces résultats correspondent exactement à ceux que l'on attendait. /// A medida que algunos países en desarrollo van adoptando sistemas financieros más liberales, quienes elaboran su política económica tienen que determinar la forma en que los tipos de interés reaccionan ante las influencias exteriores y de la política interna. Lo tradicional en la mayoría de los estudios existentes sobre tipos de interés es considerar sólo los casos extremos: una economía totalmente abierta en la que se da alguna forma de arbitraje de los tipos de interés, o una economía totalmente cerrada en la cual los tipos de interés resultan exclusivamente de la acción de factores monetarios internos. Pero las economías en desarrollo, por lo general, se encuentran a mitad de camino entre esos dos extremos, por lo cual no les serán aplicables los modelos estándar de determinación de los tipos de interés. La finalidad del presente trabajo consiste en esbozar un marco teórico que sirva de punto de partida para analizar la evolución de los tipos de interés en los países en desarrollo que han comenzado a eliminar los controles al sector financiero y las restricciones a las corrientes de capital. En el enfoque aquí sugerido se combinan elementos extraídos de modelos elaborados para economías cerradas y para economías abiertas, lo cual permite incorporar los efectos de los tipos de interés externos, de la variación prevista de los tipos de cambio y de la evolución monetaria interna sobre los tipos de interés internos. Una característica interesante del modelo presentado es que permite determinar el grado aproximado de apertura financiera --que se define como la medida en que los tipos de interés internos están vinculados a los externos-- mediante el examen de los datos del país analizado. A modo de ejemplo de la validez empírica del modelo propuesto, se le aplicó a dos países: Colombia y Singapur. Estos dos países difieren considerablemente en cuanto al grado de apertura y desarrollo financieros, por lo cual resultan idóneos para una primera comprobación de la aplicabilidad general del modelo. Este logra representar ambos casos muy adecuadamente. Las estimaciones indicaron que en Colombia tanto los factores externos como los internos revisten importancia, en tanto que en Singapur los tipos de interés internos están determinados exclusivamente por los tipos de interés externos y por las variaciones del tipo de cambio. Esto es precisamente lo que cabía esperar de acuerdo con las características del sistema financiero de estos dos países.

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Bibliographic Info

Article provided by Palgrave Macmillan in its journal Staff Papers - International Monetary Fund.

Volume (Year): 32 (1985)
Issue (Month): 3 (September)
Pages: 377-403

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Handle: RePEc:pal:imfstp:v:32:y:1985:i:3:p:377-403

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Cited by:
  1. Liliana Rojas-Suárez & Donald J. Mathieson & Michael P. Dooley, 1996. "Capital Mobility and Exchange Market Intervention in Developing Countries," IMF Working Papers 96/131, International Monetary Fund.
  2. Bhattacharya, B.B. & Bhanumurthy, N.R. & Mallick, Hrushikesh, 2008. "Modeling interest rate cycles in India," Journal of Policy Modeling, Elsevier, vol. 30(5), pages 899-915.
  3. Francisco A. Gallego & F. Leonardo Hernández, 2003. "Microeconomic effects of capital controls: The chilean experience during the 1990s," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 8(3), pages 225-253.
  4. Lanzafame, Matteo & Nogueira, Reginaldo, 2013. "Inflation targeting and interest rates," MPRA Paper 46153, University Library of Munich, Germany.
  5. Jeffrey A. Frankel, 1993. "Is Japan Creating a Yen Bloc in East Asia and the Pacific?," NBER Chapters, in: Regionalism and Rivalry: Japan and the United States in Pacific Asia, pages 53-88 National Bureau of Economic Research, Inc.
  6. Schweickert, Rainer, 1991. "Efficient real exchange rate adjustment in developing countries: alternative devaluation strategies, economic structure, and sequencing of reforms," Kiel Working Papers 473, Kiel Institute for the World Economy.
  7. Ari Aisen & David Hauner, 2008. "Budget Deficits and Interest Rates," IMF Working Papers 08/42, International Monetary Fund.
  8. Sergio L. Schmukler, 2004. "Financial globalization: gain and pain for developing countries," Economic Review, Federal Reserve Bank of Atlanta, issue Q 2, pages 39 - 66.
  9. Francisco Gallego & Leonardo Hernández & Klaus Schmidt-Hebbel, 1999. "Capital Controls in Chile: Effective? Efficient?," Working Papers Central Bank of Chile 59, Central Bank of Chile.
  10. Hanson, James A., 1992. "Opening the capital account : a survey of issues and results," Policy Research Working Paper Series 901, The World Bank.
  11. Tushar Poddar & Mangal Goswami & Juan Sole & Victor Echévarria Icaza, 2006. "Interest Rate Determination in Lebanon," IMF Working Papers 06/94, International Monetary Fund.
  12. Catherine S. F. Ho & M. Ariff, 2008. "The Role of Non-Parity Fundamentals in Exchange Rate Determination: Australia and the Asia Pacific Region," CARF F-Series CARF-F-125, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
  13. Ramkishen S. Rajan & Reza Y. Siregar & Tony Cavoli, 2006. "Financial Integration in East Asia: How Far? How Much Further to Go?," Working Papers id:372, eSocialSciences.
  14. Phylaktis, Kate, 1999. "Capital market integration in the Pacific Basin region: an impulse response analysis," Journal of International Money and Finance, Elsevier, vol. 18(2), pages 267-287, February.
  15. Christian C. Starck, 1989. "How are the key Finnish market interest rates determined?," Finnish Economic Papers, Finnish Economic Association, vol. 2(1), pages 39-47, Spring.
  16. Moore, Winston, 2010. "Managing the Process of Removing Capital Controls: What Does the Literature Suggest?," MPRA Paper 21584, University Library of Munich, Germany.
  17. Sun, Lixing, 2004. "Measuring time-varying capital mobility in East Asia," China Economic Review, Elsevier, vol. 15(3), pages 281-291.

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