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Investment and Financial Restraints: Theory and Evidence

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  • Demetriades, Panicos O
  • Devereux, Michael P

Abstract

This paper examines investment decisions in an economy with two financial markets: an official market, which is subject to rationing due to an interest rate ceiling, and an unrestricted market, with a higher interest rate. In this context, the long-run equilibrium aggregate capital stock is unambiguously higher than in the absence of the interest rate ceiling, even though its relationship with the ceiling is non-monotonic. Empirical results using aggregate panel data from 52 developing countries for the period 1974-88 provide support for the model, particularly in economies that have some access to international capital markets. Copyright @ 2000 by John Wiley & Sons, Ltd. All rights reserved.

Suggested Citation

  • Demetriades, Panicos O & Devereux, Michael P, 2000. "Investment and Financial Restraints: Theory and Evidence," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 5(4), pages 285-296, October.
    • Handle: RePEc:ijf:ijfiec:v:5:y:2000:i:4:p:285-96
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    Cited by:

    1. Audrey Chouchane-Verdier, 2004. "Une analyse empirique de l'impact de la libéralisation financière en Afrique subsaharienne sur la période 1983-1996," Revue Tiers Monde, Programme National Persée, vol. 45(179), pages 617-641.
    2. Yasunobu Tomoda & Hiroshi Kurata, 2015. "Artificially Low Interest Rates as Export Promotion Policy," The Japanese Economic Review, Japanese Economic Association, vol. 66(4), pages 550-565, December.
    3. Demetriades, Panicos O. & P. Devereux, Michael & Luintel, Kul B., 1998. "Productivity and financial sector policies: Evidence from South East Asia," Journal of Economic Behavior & Organization, Elsevier, vol. 35(1), pages 61-82, March.
    4. Dinithi Ranasinghe, 2021. "Managerial entrenchment, financial constraints, and investment choice in unlisted firms," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(1), pages 258-270, January.

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