INTRODUCTION

The process of financial liberalization was expected to increase the volatility of interest rates and asset prices, to have distributional consequences in the form of reduced or relocated rents, and to have increased competition in the financial services industry. In this chapter we examine the available data on money market and bank interest rates for evidence of these propositions.

We show that, as more and more countries liberalized, the level and dynamic behavior of developing country interest rates converged to industrial country norms. Liberalization did mean an increased short-term volatility in both real and nominal money market interest rates. Treasury Bill rates and bank spreads were evidently the most repressed, and they showed the greatest increase as liberalization progressed: This shifted substantial rents from the public sector and from favored borrowers. Whereas quoted bank spreads in industrial countries contracted again somewhat during the late 1990s, spreads in developing countries remained much higher, presumably reflecting both market power and the higher risks of lending in the developing world.

Sections 1 and 2 review the global pattern of long-term and shortterm dynamics in interest rate levels and spreads. Section 3 proposes an approach to judging when the de facto liberalization of wholesale rates occurred, and Section 4 measures the speed of adjustment of developing country interest rates to external interest rate shocks before and after these dates. Section 5 examines the way changes in wholesale rates pass through to bank lending and deposit rates. Using the date of de facto wholesale interest rate liberalization, Section 6 compares overall economic performance before and after. Section 7 contains concluding remarks.