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Interest rates, credit, and economic adjustment in Nicaragua

Listed author(s):
  • Lachler, Ulrich
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    The high commercial lending rates Nicaragua is currently experiencing, together with a perceived scarcity of credit, have often been blamed for the country's slow growth and have been considered a major failing of the adjustment program initiated in 1991. The author insists that such blame is largely misplaced. Current interest rates are indeed higher than historical levels or international benchmark rates (such as LIBOR or the U.S. treasury bill rate), but those are not the appropriate comparators for Nicaragua today. On the other hand, Nicaragua's real interest rates have risen significantly in recent years and currently exceed real rates in other Central American countries. These high real rates are attributable entirely to a real currency depreciation that has been taking place since 1992, and are not greatly different from rates observed in other Latin American countries that underwent similar adjustments. The author explains the link between real interest rates and adjustment in Nicaragua and, in that context, explores policy options for reducing interest rates. The author's main conclusion: a sustained reduction in real interest rates to below those observed in neighboring countries would require further major structural cahnges, such as the adoption of a foreign currency standard.

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    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1529.

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    Date of creation: 30 Nov 1995
    Handle: RePEc:wbk:wbrwps:1529
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    1. Carlos A. Rodríguez, 1994. "Interest Rates in Latin America," CEMA Working Papers: Serie Documentos de Trabajo. 98, Universidad del CEMA.
    2. Vicente Galbis, 1993. "High Real Interest Rates Under Financial Liberalization; Is there a Problem?," IMF Working Papers 93/7, International Monetary Fund.
    3. Khatkhate, Deena R., 1988. "Assessing the impact of interest rates in less developed countries," World Development, Elsevier, vol. 16(5), pages 577-588, May.
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