Investment and financial restraints: Theory and evidence

This paper examines investment decisions in an economy with two financial m arkets: an official market, which is subject to rationing due to an interes t rate ceiling, and an unrestricted market, with a higher interest rate. in this context, the long-run equilibrium aggregate capital stock is unambigu ously higher than in the absence of the interest rate ceiling, even though its relationship with the ceiling is non-monotonic. Empirical results using aggregate panel data from 52 developing countries for the period 1974-1988 provide support for the model, particularly in economies that have some ac cess to international capital markets. Copyright (C) 2000 John Wiley & Sons , Ltd.