September 2009

By Nathan Porter and TengTeng Xu on September 1, 2009

Interest rates in China comprise a mix of both market determined interest rates (interbank rates and bond yields), and regulated interest rates (lending and deposit rates), reflecting China’s gradual process of interest rate liberalization. We argue, using a theoretical model and empirical analysis, that the regulation of key retail interest rates diminishes the ability of the market determined rates to act as independent price signals, or as benchmarks for use in asset pricing and monetary policy. Further interest rate liberalization should, therefore, strengthen the information conveyed by movements in interest rates, allowing for the better pricing of risk and capital.

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Sara Segal-Williams

Topics:

Economy

Keywords:

Banking

Economic Reform

Interest Rates

Organization:

International Monetary Fund (IMF)

What’s the Damage? Medium-term Output Dynamics After Banking Crises

By Abdul Abiad, Ravi Balakrishnan, Petya Koeva Brooks, Daniel Leigh, and Irina Tytell on September 1, 2009

This paper investigates the medium-term behavior of output following banking crises, and its association with pre- and post-crisis conditions and policies. The authors find that output tends to be depressed substantially following banking crises, with no rebound to the pre-crisis trend. However, growth does eventually tend to return to its pre-crisis rate, with substantial crosscountry variation in outcomes. The depressed path of output typically results from reductions of roughly equal proportions in the employment rate, the capital-to-labor ratio, and total factor productivity. Initial conditions that are strongly associated with medium-run output losses include the short-run change in output, the occurrence of a joint banking-and-currency crisis, and a high precrisis level of investment. Short-run fiscal and monetary stimulus is associated with smaller medium-run deviations of output and growth from the pre-crisis trend.