The term structure of interest rates in a financially repressed economy: toward an integrated conceptual reading of the Moroccan case

Abstract

The yield curve takes the lion's share of attention in the analysis of an economy: it is pivotal in the conduct of monetary policy, the management of public debt and the pricing of assets. Existing research on Morocco has been concerned mostly with fitting the curve, and overwhelmingly through a single family: the parametric approach of Nelson-Siegel, in its dynamic form, which the reference work on the Moroccan case adopts. Equilibrium alternatives such as Vasicek or Cox-Ingersoll-Ross appear only at the margin of that literature and hold a secondary place in what follows. What this work has imported, most often without discussion, is the expectations hypothesis, which relies on the frictionless play of a marginal arbitrageur in a deep and integrated market. That assumption seems ill-suited to a market marked by captive demand, an administratively steered short rate, and a managed exchange-rate regime. The present paper is neither a statistical model nor an estimation; it is a theoretical essay of conceptual synthesis. It seeks to articulate two streams of literature that have remained separate in economics: term-structure theory (expectations, liquidity preference, segmentation, preferred habitat, equilibrium and no-arbitrage models) and the theories of financial repression, fiscal dominance and managed exchange rates. Out of that articulation stems a reading in which the shape of the curve is less a bundle of expected short rates than the imprint of a balance between a supply set by the Treasury's funding needs and a demand constrained by prudential regulation. Four propositions follow: persistent non-inversion looks structural rather than anomalous; the term premium seems governed more by the relative supply of maturities than by expected short rates; the long end appears relatively insensitive to monetary-policy shocks; and the failure of the expectations hypothesis becomes predictable. Morocco, whose captive institutional base and managed float are shared by many emerging markets, illustrates each proposition. The framework remains heuristic: no formal empirical test is conducted, and the Moroccan facts are mobilized for illustrative purposes only; these limits are discussed openly.

JEL Classification : E43, E58, G12, H63, O16.

Paper type: Theoretical Research.