The paper presents a model of interest rates structure with direct implications to the saving‐investment process. The capital market is divided into private and government sectors, which operate under the constraints of an investment‐opportunities function and a cost of capital function. The model provides the government with a degree of freedom to differentiate the lending rate from the borrowing rate. This allows the government to conduct a capital policy aimed at achieving a certain desired level of savings without disturbing the process of capital allocation. The technical operation of the model is based on an institutional structure existing in many developing countries. It allows thereby a direct application for empirical research. The paper is concluded by an empirical testing of the interest rate structure in Israel and of the consistency of the Israeli Government capital policy.
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|Published - Nov 1967