CCBS
Publications
Emancipating the Banking System and Developing Markets for
Government Debt
By Maxwell J. Fry University of Birmingham
This book, published in association with the Bank of England, assesses the damaging effects of inflationary finance, financial repression and excessive government borrowing from abroad on economic performance in 111 countries. It then presents a practical guide to developing voluntary domestic markets for government debt.
As ways of financing government deficits, inflationary finance financial repression and excessive government borrowing from abroad are associated with higher inflation, lower saving ratios and lower growth rates. Borrowing from voluntary domestic lenders in the private sector is the least harmful way of financing any given government deficit. However, the typical developing country makes little use of this fourth source, in part because of the practical difficulties involved in developing voluntary domestic markets for government debt.
Developing such markets involves a major change in the approach to financing the government deficit. Typically, the change occurs from a system in which most institutional interest rates are fixed and the government is financed at favourable fixed rates by unwilling captive buyers of its debt. To obtain a better understanding of this dramatic and possibly traumatic change to voluntary market financing, the Bank of England asked the central banks in Ghana, India, Jamaica, Malaysia, Mexico, New Zealand, Sir Lanka and Zimbabwe, countries that had recently developed voluntary domestic markets for government debt, to answer some questions about the process of change. All eight central banks responded and much of the material in this book is based on these questionnaire responses.
