INTRODUCTION

The purpose of this brief introduction is to explain the motivation for our work and provide a brief outline of the chapters to follow.

Inspired by the influential works of McKinnon (1973) and Shaw (1973), and by the requirements of the IMF/World Bank sponsored structural adjustment programs, the effects of financial liberalization on investment in developing countries have drawn much attention. The major thrust of this literature has been to understand the mechanisms by which interest rate deregulation and the elimination of other forms of financial repression-for example, changes in reserve requirements-affect savings and investment. Broadly speaking, we can distinguish two sets of approaches in the literature: those based on non-optimizing models and those which involve optimizing frameworks. The former includes works which essentially build on the model suggested by McKinnon (1973). This body of literature is extensively summarized in Fry (1988) and Gibson and Tsakalotos (1994). The optimizing models draw their inspiration from the pioneering works of Romer (1986) and Lucas (1988) on endogenous growth models. This part of the literature is extensively surveyed by Berthelemy and Varoudakis (1994), De la Fuente and Marin (1993), Pagano (1993) and Schiantarelli et al. (1994b), but see also the appendix to this chapter.