Financial liberalization, urban unemployment and welfare: Some implications of the artificial low interest rate and the high wage rate policies in LDCs

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This paper investigates how the low interest rate policy in the commercial banking sector affects the urban unemployment in a small open Harris-Todaro model. The rate of urban unemployment unambiguously declines. The volume of it shrinks if the rural-to-urban employment rate and the urban unemployment rate are sufficiently high relative to the wage elasticity of agricultural labor demand. The national income increases if agriculture is dominant in the domestic production. In such an economy, the "financial liberalization" advocated by the Mckinnon-Shaw school may aggravate the welfare even if it eliminates the "financial repression".

Original languageEnglish
Pages (from-to)163-179
Number of pages17
JournalJournal of Development Economics
Issue number1
Publication statusPublished - 2003 Oct
Externally publishedYes



  • Financial liberalization
  • Low interest rate policy
  • Urban unemployment

ASJC Scopus subject areas

  • Economics and Econometrics

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