INTEREST-RATE POLICY, TAXATION AND RISK

It is now an established orthodoxy that real interest rates should be positive. Raising the nominal interest rate above the rate of inflatio n, however, does not achieve a positive cost of borrowing, if the inte rest cost of borrowing is tax deductible. Furthermore, high rates of i nterest and inflation impose heavy risks on borrowers. These points ar e illustrated with data from a sample of countries in Eastern and Sout hern Africa. They strengthen the case for preferring lower inflation t o higher nominal interest rates as a way of making real interest rates positive.