Financial liberialization, currency substitution and investment: the case of Egypte

Abstract

The orthodox approach to financial liberalization ignores the presence of currency substitution which considerably complicated the suggested relationships between the real interest rate, saving and investment. The case of Egypt demonstrates that financial liberalization under such conditions may require the maintenance of high real interest rate would have a positive effect on investment through the investment, its adverse impact through increasing the cost of credit and reducing the attract excessive capital inflows which tend to jeopardize macro-economic management. This aspect is again not catered for by the orthodox approach which assumes a closed economy.