ABSTRACT
Financial liberalisation in a number of Asian countries has helped make financial systems more efficient and has enhanced the effectiveness and flexibility of monetary policies. R. I. McKinnon contends that higher positive real interest rates are necessary to encourage agents to accumulate real money balances, increase financial intermediation and unification of financial markets, thereby ensuring an efficient utilization of resources for economic growth. In the Asian countries, the key reforms were aimed at liberalising interest rates, reducing control on credit, enhancing competition and efficiency in the financial system, strengthening the supervisory framework and promoting the growth and deepening of financial markets. Positive real interest rates, therefore, contribute to economic growth by promoting financial deepening and improving the productivity of investment. In a ‘bank-based’ system, borrowers rely heavily on bank loans rather than on equity since capital market in the majority of the Asian developing countries are at their infancy stage.
