Interest Rate Policy in Central and Eastern Europe: The Influence of Monetary Overhangs and Weak Enterprise Discipline
IMF Working Papers, September 1, 1992
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- Interest Rate Policy in Central and Eastern Europe: The Influence of Monetary Overhangs and Weak Enterprise Discipline
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Bibliographic details
- Authors: Susan M Schadler, Adam Bennett
- Published: September 1, 1992
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451848946.001
Overview and objectives
- Examines interest rate policy in newly reforming Central and Eastern European countries, focusing on establishing positive real interest rates and defending the exchange rate.
- Investigates effects of administrative increases in controlled nominal interest rates on inflation, the real interest rate, and the exchange rate.
- Uses simulations to assess the importance of linkages among nominal interest rates, credit growth, depreciation, and inflation.
Key findings
- The principal instrument used has been administrative increases in controlled interest rates.
- Raising nominal interest rates when financial discipline over enterprises is weak can:
- do little more than raise credit growth,
- increase the rate of depreciation,
- and ultimately raise inflation.
- The paper highlights important interactions between monetary overhangs, enterprise behavior, and macroeconomic outcomes.
Methods and analysis
- Analytical assessment of policy adjustments and their effects on inflation, real interest rates, and exchange rates.
- Simulations employed to shed light on the quantitative importance of linkages between:
- nominal interest rate adjustments,
- credit creation,
- exchange rate depreciation,
- inflation dynamics.
Policy implications and considerations
- Administrative increases in controlled interest rates are not guaranteed to tighten real financial conditions if enterprise discipline is weak.
- Policymakers should consider the potential for higher nominal rates to stimulate credit growth and currency depreciation in environments with weak enterprise financial discipline.
- Complementary measures to strengthen enterprise discipline and financial sector enforcement are implied as necessary to ensure interest rate policy achieves desired anti-inflationary and exchange-rate objectives.
Subjects and keywords
- Subject: Demand for money, Exchange rates, Financial services, Foreign exchange, Inflation, Interest rate policy, Monetary policy, Money, Prices, Real interest rates
- Keywords: broad money, Central and Eastern Europe, credit creation, Demand for money, Eastern Europe, Eastern europe nominal interest rates, Exchange rates, Inflation, Interest rate policy, nominal interest rate policy, price level, rate of inflation, rate of interest, real interest rate target, Real interest rates, targeted real interest rates, WP