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Emerging Markets’ Deficits, Privatization, and Interest Rates

Author

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  • Walker, David A.

    () (The McDonough School of Business, Georgetown University, Washington)

Abstract

Emerging markets face unique issues as they try to restrain their twin deficits, privatize their economies, and control interest rates and infl ation. This study provides a four-equation model, estimated across 31 emerging market countries, to identify the exogenous and policy factors that affect these variables. The effects on interest rates from changes in fiscal deficits, trade deficits, and privatization are statistically signifi cant. Policy makers can reduce interest rates by pursuing three goals: reducing fi scal defi cits, reducing trade defi cits, and increasing levels of privatization. The reduced form of the interest rate equation under stable conditions has a negative coeffi cient for the change in privatization and positive coeffi cients for both changes in the fi scal and trade defi cits. Therefore, interest rates are expected to decline with an increase in privatization and a decrease in either the fi scal or the trade defi cit, or both. The greatest impact results from an emerging market country reducing its fi scal deficit.

Suggested Citation

  • Walker, David A., 2007. "Emerging Markets’ Deficits, Privatization, and Interest Rates," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 60(1), pages 83-109.
  • Handle: RePEc:ris:ecoint:0067
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    Keywords

    Emerging markets; defi cits; interest rates;

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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