ABSTRACT
Relaxing interest rate controls is a key part and an important goal of interest rate liberalization in both the Chinese and global context. South Korea started to liberalize interest rates in 1981 by first deregulating deposit and lending rates and then interbank rates. The reform was mostly driven by financial innovation of banks for the purpose of bypassing interest rate regulation. When reaching a certain stage, the innovation was legalized by the government, which further pushed forward the process of interest rate liberalization. The reward of interest rate liberalization includes the effective mobilization of savings, relieving financing restraints on enterprises and households, increased capital allocation efficiency and more reasonable income distribution. The goal of interest rate liberalization is to have the market replace the monetary authorities and play the decisive role in determining interest rates, with the banks setting deposit and loan rates.
