ABSTRACT
The relationship between economic growth and ‘financial repression’ has become a matter of considerable recent theoretical and empirical investigation (see, for example, McKinnon 1973, 1976; Shaw 1973; Kapur 1976; Wijnbergen 1983, 1984; Ghatak 1981; Galbis 1977; Vogel and Buser 1976; Gupta 1986; and Fry 1978, 1988). Most writers have tried to analyse the implications of a policy of interest rate liberalization on savings, investment and economic growth in less developed countries (LDCs). Most LDCs suffer from capital scarcity, yet interest rates in the money markets of LDCs hardly reflect the opportunity cost of capital, given the interest rate ceilings. Some argue that a higher interest rate in LDCs will have a beneficial effect upon savings, if the economic agents in LDCs respond ‘rationally’ to price signals. A higher level of savings can then be invested to achieve a higher rate of economic growth.
