Emancipating the Banking System and Developing Markets for Government Debt

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ISBN: 9780415156400 | 0415156408
Cover: Hardcover
Copyright: 4/7/1997

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Monetary policy in developing countries is largely based on a system introduced in the 1960's.Emancipating the Banking System and Developing Markets for Government Debtillustrates how this outdated system has led to financial repression and suggests some alternatives. Maxwell Fry is one of the leading experts in this area. His book will provide a much-needed study for those studying development and finance economics at an advanced level.

List of Figures

(2)

List of Tables

xiii

(2)

Foreword

(2)

Acknowledgements

xvii

Part I Introduction and Debt-Deficit Dynamics

(48)

1 Why Develop Markets for Government Debt? Overview and Summary

(23)

1.1 Introduction

(4)

1.2 The Case Against Inflationary Finance, Financial Repression and Government Borrowing from Abroad

(2)

1.2.1 Deficits, Inflation and Growth

(1)

1.2.2 The Central Bank and Inflationary Finance

(1)

1.2.3 Financial Repression

(1)

1.2.4 Foreign Debt Accumulation

(1)

1.3 The Case for Voluntary Domestic Markets

(9)

1.3.1 Essential Elements

(1)

1.3.2 Persuasion

(1)

1.3.3 Macroeconomic Prerequisites

(1)

1.3.4 Microeconomic Prerequisites

(1)

1.3.5 The Players

(1)

1.3.6 Primary Markets

(1)

1.3.7 Secondary Markets

(1)

1.3.8 Spillover to Markets for Private Sector Debt

(1)

1.3.9 Summary of Developing Markets for Government Debt

(1)

1.4 Roles for the Central Bank?

(7)

1.4.1 Information Provider

(1)

1.4.2 Issue Manager

(1)

1.4.3 Market Maker

(1)

1.4.4 Auction Participation

(1)

1.4.5 Clearing and Settlement Systems

(3)

1.4.6 Regulation and Supervision

(1)

1.4.7 Secondary Market Development

(1)

1.5 Conclusion

(1)

2 Debts, Deficits, Inflation and Growth

(23)

2.1 Introduction

(1)

2.2 The Government Budget Constraint

(4)

2.2.1 A Numerical Example

(1)

2.2.2 Stability when the Interest Rate Exceeds the Growth Rate

(1)

2.2.3 Recapitulation

(1)

2.3 The Fiscal Approach to Inflation and Financial Repression

(1)

2.4 Government Deficits and Debts in 111 Countries

(4)

2.5 The Intertemporal Budget Constraint in Practice

(1)

2.6 The Italian Case

(1)

2.7 Six Country Studies

(3)

2.8 Time Trends

(1)

2.9 Deficits, Inflation, Saving and Growth

(4)

2.10 Conclusion

(3)

Part II Captive and Foreign Markets

(70)

3 The Central Bank and Inflationary Finance

(18)

3.1 Introduction

(1)

3.2 Central Bank Financing of Government Deficits

(6)

3.2.1 Flow Variables

(1)

3.2.2 Stock Variables

(3)

3.2.3 Time Trends

(2)

3.3 Effects of Government Borrowing from the Central Bank

(10)

3.3.1 Deficits and Reserve Money Growth

(1)

3.3.2 Growth and Reserve Money Growth

(2)

3.3.3 Inflation and the Proportion of Central Bank Financing

(2)

3.3.4 National Saving and the Proportion of Central Bank Financing

(1)

3.3.5 Growth and the Proportion of Central Bank Financing

(2)

3.3.6 Growth and Inflation

(3)

3.4 Conclusion

(1)

4 Financial Repression

(35)

4.1 Introduction

(1)

4.2 Real Interest Rate Distortions

(1)

4.3 Rationale for Financial Repression

(3)

4.4 Financial Restriction and Financial Repression

(2)

4.5 The Financial Repression Paradigm

(3)

4.6 Pathologically High Real Interest Rates

(2)

4.7 Empirical Evidence

(8)

4.7.1 Early Studies of Growth and Real Interest Rates

(3)

4.7.2 Growth, Investment and Real Interest Rates

(1)

4.7.3 Recent Studies of Growth and Real Interest Rates

(1)

4.7.4 A New Estimate of Growth and Real Interest Rates

(2)

4.8 Domestic Credit Expropriation and High Reserve Requirements

(3)

4.9 Saving, Growth and Financial Distortions

(10)

4.9.1 National Saving

(1)

4.9.2 Investment

(1)

4.9.3 Export Growth

(1)

4.9.4 Output Growth

(1)

4.9.5 Direct and Indirect Effects of Financial Distortions on National Saving Ratios and Output Growth Rates in the Pacific Basin and Other Developing Regions

(5)

4.10 Conclusion

102

(2)

5 Foreign Debt Accumulation

104

(15)

5.1 Introduction

104

(1)

5.2 A Model of Foreign Debt Accumulation

105

(6)

5.2.1 Some Balance-of-Payments Accounting

105

(1)

5.2.2 Stabilising Financial Effects

106

(2)

5.2.3 Destabilising Fiscal Effects

108

(2)

5.2.4 Debt Effects on Investment

110

(1)

5.3 Empirical Evidence

111

(5)

5.3.1 Saving and Investment Behaviour

111

(2)

5.3.2 New Estimates of Inflation, Saving, Growth and Foreign Debt Accumulation

113

(2)

5.3.3 Alternative Policy Responses

115

(1)

5.4 Conclusion

116

(3)

Part III Developing Voluntary Domestic Markets

119

(68)

6 Prerequisites, Persuasion and Pitfalls

121

(35)

6.1 Introduction

121

(2)

6.2 The Essential Elements

123

(6)

6.2.1 Disequilibrium Pricing

123

(1)

6.2.2 Equilibrium Market Pricing

124

(1)

6.2.3 Illusory Equilibrium Pricing

124

(3)

6.2.4 Unstable Equilibrium Pricing

127

(2)

6.3 Perceived Benefits

129

(3)

6.3.1 Lack of Voluntary Markets

129

(1)

6.3.2 Existence of Voluntary Markets

130

(2)

6.4 Persuading the Main Political Actors

132

(3)

6.4.1 Two Historical Examples

133

(1)

6.4.2 The Case Study Countries

134

(1)

6.5 Macroeconomic Prerequisites

135

(6)

6.5.1 Macroeconomic Stability

136

(1)

6.5.2 Coordination

136

(1)

6.5.3 Tightening Monetary Policy

137

(1)

6.5.4 The Case Study Countries

138

(2)

6.5.5 Supervision and Regulation

140

(1)

6.6 Sequencing

141

(3)

6.7 Risk Perceptions

144

(4)

6.8 Crowding Out?

148

(2)

6.9 Implementing Monetary Policy

150

(2)

6.10 Pitfalls

152

(2)

6.11 Conclusion

154

(2)

7 The Players and the Markets

156

(18)

7.1 Introduction

156

(1)

7.2 Microeconomic Prerequisites

156

(2)

7.3 The Players

158

(8)

7.3.1 Finance Ministry

159

(1)

7.3.2 Central Bank

160

(1)

7.3.3 Financial Institutions

161

(1)

7.3.4 Primary Dealers

162

(4)

7.4 Market Structure

166

(1)

7.5 Primary Markets

166

(3)

7.6 Secondary Markets

169

(2)

7.7 Spillover to Markets for Private Sector Debt

171

(1)

7.8 Conclusion

172

(2)

8 Roles for the Central Bank

174

(13)

8.1 Introduction

174

(2)

8.2 Information Provider

176

(1)

8.3 Issue Manager

177

(1)

8.4 Market Maker

178

(1)

8.5 Auction Participation

179

(2)

8.6 Clearing and Settlement Systems

181

(2)

8.7 Regulation and Supervision

183

(1)

8.8 Secondary Market Development

183

(1)

8.9 Conclusion

184

(3)

Appendix 1 Central Bank Case Study Questionnaire

187

(2)

Appendix 2 Government Deficits as Percent of GDP

189

(3)

Appendix 3 Government Domestic Debt as Percent of GDP

192

(3)

Appendix 4 Government Foreign Debt as Percent of GDP

195

(3)

Appendix 5 Government Debt as Percent of GDP

198

(3)

Appendix 6 Government and Government-Guaranteed Foreign Debt as Percent of GDP

201

(3)

Appendix 7 Continuously Compounded Rates of Economic Growth

204

(3)

Appendix 8 Real Interest Rates

207

(3)

Appendix 9 Continuously Compounded CPI Inflation Rates

210

(3)

Appendix 10 Change in Reserve Money as Percent of GDP

213

(3)

Appendix 11 Reserve Money as Percent of Broad Money (M2)

216

(3)

Appendix 12 Bank Reserves as Percent of Bank Deposits

219

(3)

Appendix 13 Growth Rates in Eight Case Study Countries

222

(1)

Appendix 14 Inflation Rates in Eight Case Study Countries

222

(1)

Appendix 15 Government Deficits as Percent of GDP in Eight Case Study Countries

223

(1)

Appendix 16 Government Domestic Debt as Percent of GDP in Eight Case Study Countries

223

(1)

Appendix 17 Government Foreign Debt as Percent of GDP in Eight Case Study Countries

224

(1)

Appendix 18 Government Debt as Percent of GDP in Eight Case Study Countries

224

(1)

Appendix 19 Government and Government-Guaranteed Foreign Debt as Percent of GDP in Eight Case Study Countries

225

(1)

Appendix 20 Change in Reserve Money as Percent of GDP in Eight Case Study Countries

225

(1)

Appendix 21 Net Domestic Credit to Government as Percent of Aggregate Domestic Credit in Eight Case Study Countries

226

(1)

Appendix 22 Reserve Money as Percent of Broad Money (M2) in Eight Case Study Countries

226

(1)

Appendix 23 Bank Reserves as Percent of Bank Deposits in Eight Case Study Countries

227

(1)

Appendix 24 Real Interest Rates in Eight Case Study Countries

227

(1)

Appendix 25 Central Bank Governors' Symposium Participants

228

(5)

Bibliography

233

(12)

Index

245

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Emancipating the Banking System and Developing Markets for Government Debt

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