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An endogenous growth model of money, banking, and financial repression

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  • Marco Espinosa
  • Chong K. Yip

Abstract

In this paper, we develop an endogenous growth model with financial intermediation to examine the effects of financial repression on growth, inflation, and welfare. By limiting the liquidity provision, binding reserve requirements always suppress economic growth while their effect on inflation is a function, among other things, of the degree of repression. For example, contrary to previous claims, if financial repression is severe enough so that an informal financial sector emerges, liberalization is inflationary. Notwithstanding, liberalization in these cases is always welfare improving. Finally, we characterize the condition that gives rise to a unique optimal level of binding reserve requirements, i.e., the optimal degree of "moderate" financial repression.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Atlanta in its series Working Paper with number 96-4.

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Date of creation: 1996
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Handle: RePEc:fip:fedawp:96-4

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Keywords: Financial markets ; Money theory;

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Cited by:
  1. Rangan Gupta, 2005. "Financial Liberalization and Inflationary Dynamics," Working papers 2005-31, University of Connecticut, Department of Economics.
  2. Javier Andrés & Ignacio Hernando & J. David López-Salido, 1999. "The Role of the Financial System in the Growth-Inflation Link: the OECD Experience," Banco de Espa�a Working Papers 9920, Banco de Espa�a.
  3. Marco A. Espinosa & Chong K. Yip, 1995. "Fiscal and monetary policy interactions in an endogenous growth model with financial intermediaries," Working Paper 95-10, Federal Reserve Bank of Atlanta.
  4. Rangan Gupta, 2004. "Costly State Monitoring and Reserve Requirements," Working papers 2004-33, University of Connecticut, Department of Economics, revised Jul 2005.
  5. Hernando Vargas, 1996. "Apertura, Encajes E Intermediación Financiera," ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE.

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