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Interest Rates, Credit Rationing, and Investment in Developing Countries

  • Mwanza Nkusu
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    This paper examines the impact of interest rates and inflation on bank loans and investment within a framework that mimics the financial sectors prevailing in most low-income developing countries. The paper emphasizes the importance of treating the lending and deposit rates of interest as distinct parameters in investment equations. The spread between the two rates is indicative of default risk and has a negative impact on incremental loan amounts associated with higher lending rates, in particular in economies with flawed institutions. The model presented in the paper highlights the importance of promoting macroeconomic stability and upgrading institutions and informational infrastructure.

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    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=16330
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    Paper provided by International Monetary Fund in its series IMF Working Papers with number 03/63.

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    Length: 31
    Date of creation: 01 Mar 2003
    Date of revision:
    Handle: RePEc:imf:imfwpa:03/63
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    1. Mauro, Paolo, 1995. "Corruption and Growth," The Quarterly Journal of Economics, MIT Press, vol. 110(3), pages 681-712, August.
    2. Andrew B. Abel, 1985. "Dynamic Behavior of Capital Accumulation in a Cash-in-Advance Model," NBER Working Papers 1549, National Bureau of Economic Research, Inc.
    3. Palivos, T. & Wang, P. & Zhang, 1990. "Velocity of Money in a Generalized Cash-In-Advance Economy: Theory and Evidence," Papers 12-90-5, Pennsylvania State - Department of Economics.
    4. Brock, Philip L. & Rojas Suarez, Liliana, 2000. "Understanding the behavior of bank spreads in Latin America," Journal of Development Economics, Elsevier, vol. 63(1), pages 113-134, October.
    5. Grogan, Louise & Moers, Luc, 2001. "Growth empirics with institutional measures for transition countries," Economic Systems, Elsevier, vol. 25(4), pages 323-344, December.
    6. Stockman, Alan C., 1981. "Anticipated inflation and the capital stock in a cash in-advance economy," Journal of Monetary Economics, Elsevier, vol. 8(3), pages 387-393.
    7. Jaffee, Dwight M & Russell, Thomas, 1976. "Imperfect Information, Uncertainty, and Credit Rationing," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 651-66, November.
    8. Jaffee, Dwight & Stiglitz, Joseph, 1990. "Credit rationing," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 16, pages 837-888 Elsevier.
    9. Giovanna Mossetti, 1990. "Inside Money, Output, and Inventories in a Business Cycle," Canadian Journal of Economics, Canadian Economics Association, vol. 23(2), pages 381-99, May.
    10. Stephen D. Williamson, 1984. "Costly Monitoring, Loan Contracts and Equilibrium Credit Rationing," Working Papers 572, Queen's University, Department of Economics.
    11. King, Robert G & Levine, Ross, 1993. "Finance and Growth: Schumpeter Might Be Right," The Quarterly Journal of Economics, MIT Press, vol. 108(3), pages 717-37, August.
    12. Jaffee, Dwight M & Modigliani, Franco, 1969. "A Theory and Test of Credit Rationing," American Economic Review, American Economic Association, vol. 59(5), pages 850-72, December.
    13. Joshua Greene & Delano Villanueva, 1991. "Private Investment in Developing Countries: An Empirical Analysis," IMF Staff Papers, Palgrave Macmillan, vol. 38(1), pages 33-58, March.
    14. Hellwig, Martin F., 1993. "The challenge of monetary theory," European Economic Review, Elsevier, vol. 37(2-3), pages 215-242, April.
    15. Englund, Peter & Svensson, Lars E O, 1988. "Money and Banking in a Cash-in-Advance Economy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(4), pages 681-705, November.
    16. Cardoso, Eliana, 1993. "Private Investment in Latin America," Economic Development and Cultural Change, University of Chicago Press, vol. 41(4), pages 833-48, July.
    17. Hutchison, David E, 1995. "Retail Bank Deposit Pricing: An Intertemporal Asset Pricing Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(1), pages 217-31, February.
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