ABSTRACT
In the previous chapters we have concentrated on the effects of interest rate deregulation on investment. Another aim of financial deregulation can be to reduce the cost of financial intermediation, thus improving the functional efficiency of the banking system. One way to assess the functional efficiency of the banking system is to examine the magnitude of the spread between the deposit and the lending rates. While some attempts have been made to measure this spread for individual developing countries (see, for example, Capoglu (n.d.) for Turkey), there is little formal analysis of the effect of changes in banking efficiency on investment and other real or financial variables. The only exception that we are aware of, and that too for the developed countries, is the one by Viaene (1993). This study is briefly summarized in the next section.
