Interest Rate and Growth in Developing Countries

Dragisa Velickovic and Jelena Velickovic

Ekonomika, Journal for Economic Theory and Practice and Social Issues, 2016, vol. 62, issue 2

Abstract: When developing countries begin to raise the trajectory of long-term development, interest rates and local currencies grow higher. An increase in the real cost of capital, a decline in investment demands, as the IS-LM model envisages, may jeopardize growth. Can the interest rate policy be used to efficiently manage aggregate demand to sustain the initiated growth? It has proved quite successful at higher interest rate policy levels of development. In underdeveloped countries, this is not the case. Developing countries largely fail to succeed in ensuring the full operation of market mechanisms. Their financial market is underdeveloped, capital demand is chronically high, and therefore the manipulation of the discount rate is of little use. In recession, manipulating government expenditures, implementing deficit financing and controlling private and public consumption prove to be more efficient anti-recession instruments. Economic policy ought to provide a favorable environment for achieving developmental objectives: relative price stability and favorable interest rates. Underdeveloped countries need to control, channel and impose certain restrictions. The liberalization of capital transactions must not precede full convertibility of the local currency

Keywords: International; Development (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:ags:sereko:288844

DOI: 10.22004/ag.econ.288844

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