Emancipating the Banking System and Developing Markets for Government Debt

by Fry,Maxwell

• ISBN13: 9780415156400
• ISBN10: 0415156408
• Edition: 1st
• Format: Hardcover
• Copyright: 1997-04-07
• Publisher: Routledge

Summary

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introduced in the 1960's.Emancipating the Banking System and Developing Markets for Government Debtillustrates how this outdated system has led to financial repression and suggests some alternatives.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.

Table of Contents

List of Figures	xi	(2)
List of Tables	xiii	(2)
Foreword	xv	(2)
Acknowledgements	xvii
Part I Introduction and Debt-Deficit Dynamics	1	(48)
1 Why Develop Markets for Government Debt? Overview and Summary	3	(23)
1.1 Introduction	3	(4)
1.2 The Case Against Inflationary Finance, Financial Repression and Government Borrowing from Abroad	7	(2)
1.2.1 Deficits, Inflation and Growth	7	(1)
1.2.2 The Central Bank and Inflationary Finance	8	(1)
1.2.3 Financial Repression	8	(1)
1.2.4 Foreign Debt Accumulation	9	(1)
1.3 The Case for Voluntary Domestic Markets	9	(9)
1.3.1 Essential Elements	10	(1)
1.3.2 Persuasion	11	(1)
1.3.3 Macroeconomic Prerequisites	12	(1)
1.3.4 Microeconomic Prerequisites	13	(1)
1.3.5 The Players	14	(1)
1.3.6 Primary Markets	15	(1)
1.3.7 Secondary Markets	16	(1)
1.3.8 Spillover to Markets for Private Sector Debt	17	(1)
1.3.9 Summary of Developing Markets for Government Debt	18	(1)
1.4 Roles for the Central Bank?	18	(7)
1.4.1 Information Provider	19	(1)
1.4.2 Issue Manager	20	(1)
1.4.3 Market Maker	20	(1)
1.4.4 Auction Participation	21	(1)
1.4.5 Clearing and Settlement Systems	21	(3)
1.4.6 Regulation and Supervision	24	(1)
1.4.7 Secondary Market Development	24	(1)
1.5 Conclusion	25	(1)
2 Debts, Deficits, Inflation and Growth	26	(23)
2.1 Introduction	26	(1)
2.2 The Government Budget Constraint	27	(4)
2.2.1 A Numerical Example	28	(1)
2.2.2 Stability when the Interest Rate Exceeds the Growth Rate	29	(1)
2.2.3 Recapitulation	30	(1)
2.3 The Fiscal Approach to Inflation and Financial Repression	31	(1)
2.4 Government Deficits and Debts in 111 Countries	32	(4)
2.5 The Intertemporal Budget Constraint in Practice	36	(1)
2.6 The Italian Case	37	(1)
2.7 Six Country Studies	38	(3)
2.8 Time Trends	41	(1)
2.9 Deficits, Inflation, Saving and Growth	42	(4)
2.10 Conclusion	46	(3)
Part II Captive and Foreign Markets	49	(70)
3 The Central Bank and Inflationary Finance	51	(18)
3.1 Introduction	51	(1)
3.2 Central Bank Financing of Government Deficits	52	(6)
3.2.1 Flow Variables	52	(1)
3.2.2 Stock Variables	53	(3)
3.2.3 Time Trends	56	(2)
3.3 Effects of Government Borrowing from the Central Bank	58	(10)
3.3.1 Deficits and Reserve Money Growth	58	(1)
3.3.2 Growth and Reserve Money Growth	59	(2)
3.3.3 Inflation and the Proportion of Central Bank Financing	61	(2)
3.3.4 National Saving and the Proportion of Central Bank Financing	63	(1)
3.3.5 Growth and the Proportion of Central Bank Financing	63	(2)
3.3.6 Growth and Inflation	65	(3)
3.4 Conclusion	68	(1)
4 Financial Repression	69	(35)
4.1 Introduction	69	(1)
4.2 Real Interest Rate Distortions	70	(1)
4.3 Rationale for Financial Repression	71	(3)
4.4 Financial Restriction and Financial Repression	74	(2)
4.5 The Financial Repression Paradigm	76	(3)
4.6 Pathologically High Real Interest Rates	79	(2)
4.7 Empirical Evidence	81	(8)
4.7.1 Early Studies of Growth and Real Interest Rates	82	(3)
4.7.2 Growth, Investment and Real Interest Rates	85	(1)
4.7.3 Recent Studies of Growth and Real Interest Rates	86	(1)
4.7.4 A New Estimate of Growth and Real Interest Rates	87	(2)
4.8 Domestic Credit Expropriation and High Reserve Requirements	89	(3)
4.9 Saving, Growth and Financial Distortions	92	(10)
4.9.1 National Saving	93	(1)
4.9.2 Investment	94	(1)
4.9.3 Export Growth	95	(1)
4.9.4 Output Growth	96	(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	97	(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