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Determining Interest Rates and Reasons Why Countries Prematurely Exit International Monetary Fund (IMF) - Supported Programs
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This dissertation focuses on the determination of interest rates in an overlapping generations (OG) economy and the reasons why countries prematurely exit International Monetary Fund (IMF) - supported programs. The first chapter presents an OG economy with production where we allow capital to accumulate for future productive use. Unlike previous OG models with production developed by Diamond (1965) and Tirole (1965), which do not allow capital to accumulate, we find that the model fundamentally alters when capital is allowed to accumulate. Specifically, we find that the interest rate paid on saving must be different from the rental rate on capital for both the capital market and the product marketto clear simultaneously. This allows us to present a modified theory for the determination of interest rates. The second chapter presents a three-period, small open economy model and we show that countries may choose to exit IMF-supported programs prematurely, before program completion, if they anticipate higher economic growth. In other words, we show that the premature program exits are not necessarily due to shortcomings in the IMF program’s design, as shown by some empirical studies in the past. The third chapter extends the OG economy with production developed in the first chapter to include technological growth, to present a more complete and updated model of the determination of interest rates. I show that both labor growth rate and technological growth rate play a role in the determination of interest rates.