Distortions in Developing Countries’ Financial Markets
In recent years, many developing countries’ governments have attempted to reform their financial markets to improve their efficiency and stability. The driving force behind their reform attempts has been the realization by these governments that they could not maintain a tightly regulated financial sector in view of the internal and external developments affecting their economies. Internally, the economies were affected by inadequate financial savings, in part as a result of negative real interest rates or the loss over time of real purchasing power of financial assets, by a reduction in the demand for the domestic currency influenced by devaluation expectations, and by declining real economic performance as a result of reduced investment and contracting economic capacity and efficiency. Externally, the economies were at least affected by high and volatile real interest rates, flexible exchange rates, and by the competitive impact of deregulated and innovative financial markets of the developed countries.
KeywordsInterest Rate Financial Market Foreign Exchange Portfolio Selection Credit Rationing
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