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Why are domestic interest rates so high?
Borc, Costin |
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This paper aims to explain the high level of domestic interest rates in Romania during the last three years (1997-1999). Romania’s government was running a tight monetary policy while simultaneously trying to reduce the fiscal deficit with the declared intention to stop the decline of economic activity and create a sound base for long term economic growth. Many observers blamed the high interest rates as the main roadblock for a potential upturn in the real economy. One of the major questions that was asked during the period we are focusing on was how to reduce interest rates. We explored the literature on stabilization and inflation to search for an answer and we were able to come up with a mixed response. In our opinion, there is no single action that can be taken that will substantially influence the level of interest rates. The factors that we are considering in this paper are the impact of using exchange rates as a nominal anchor, the existence of chronic inflation, tax arrears, and the monopoly position of banks in both the Treasury securities and interbank markets.
There are multiple factors that affect the interest rate and the government must address all of them to significantly influence or reduce its level. |
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