For McKinnon and Shaw. most of the negative impacts of financial repression flowed from the imposition of artificially low interest rates. According to McKinnon and Shaw. if all countries operate with no restrictions on inflows and outflows of capital g

According to the McKinnon and Shaw hypothesis, interest rate liberalization can lead to several predicted benefits. Here are five key benefits highlighted in their framework:

**Improved Savings Mobilization**: By allowing interest rates to reflect market conditions, individuals are more likely to save since higher interest rates provide greater returns on savings. This increased savings helps to mobilize domestic financial resources effectively.

**Efficient Allocation of Capital**: With interest rate liberalization, financial resources can flow towards the most productive investment opportunities. This provides a more efficient allocation of capital as financial markets balance supply and demand for funds based on returns.

**Increased Investment**: Higher interest rates can attract foreign and domestic investment by offering better returns. As capital becomes available for firms and entrepreneurs, overall investment levels can rise, contributing to economic growth.

**Enhanced Financial Intermediation**: Interest rate liberalization can lead to a more competitive financial sector, encouraging banks and financial institutions to improve their services, innovate, and efficiently match savers and borrowers. This can result in a stronger and more responsive financial system.

**Reduction in Financial Disintermediation**: By lifting interest rate caps and allowing market-driven rates, the risks of financial disintermediation (where savers seek alternative non-bank means of saving) decrease. This results in a more stable and widespread participation in the formal financial sector.

These benefits collectively contribute to greater economic growth and development as countries transition from restrictive financial environments to ones driven by market principles.