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Financial Repression and Exchange Rate Management in Developing Countries: Theory and Empirical Evidence for India Author info | Abstract | Publisher info | Download info | Related research | Statistics Renu Kohli
Kenneth Kletzer
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Most developing countries have imposed restrictions on domestic and international financial transactions at one time or another. Such restrictions have allowed governments to generate significant proportions of their revenues from financial repression while restraining inflation. The eventual fiscal importance of the revenues from seignorage and from implicit taxation of financial intermediation pose a challenge for financial reform and liberalization. This paper presents a model of the role of financial repression in fiscal policy and exchange rate management under capital controls. We show how a balance of payments crisis arises under an exchange rate peg without capital account convertibility in the model economy and how the instruments of financial repression may be used for exchange rate management. The model is compared to the experience of India, a country that exemplifies the fiscal importance of financial restrictions, in the last two decades. In particular, we discuss the dynamics leading up to devaluation in 1991 and the role of financial repression in exchange rate intervention afterwards.
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Paper provided by International Monetary Fund in its series IMF Working Papers with number
01/103.
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Length: 42 pages
Date of creation: 04 Sep 2001Date of revision:
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Keywords: Financial sector Developing countries India Payments imbalances Exchange rates Economic models References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile , click on "citations" and make appropriate adjustments.:
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Full
references Cited by : (explanations , Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile , click on "citations" and make appropriate adjustments.)
Renu Kohli, 2004.
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International Finance
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Joshua Aizenman & Ilan Noy, 2004.
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1022, Department of Economics, UC Santa Cruz.
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Other versions: Joshua Aizenman & Ilan Noy, 2004.
"Endogenous Financial and Trade Openness: Political Economy Considerations ,"
Economics Study Area Working Papers
72, East-West Center, Economics Study Area, revised Sep 2004.
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Joshua Aizenman & Ilan Noy, 2003.
"Endogenous Financial Openness: Efficiency and Political Economy Considerations ,"
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Joshua Aizenman & Ilan Noy, 2004.
"Endogenous Financial and Trade Openness: Efficiency and Political Economy Considerations ,"
Working Papers
200404, University of Hawaii at Manoa, Department of Economics.
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Kenneth Kletzer, 2004.
"Liberalizing Capital Flows in India: Financial Repression, Macroeconomic Policy and Gradual Reforms ,"
Santa Cruz Department of Economics, Working Paper Series
1006, Department of Economics, UC Santa Cruz.
[Downloadable!]
Other versions: Joshua Aizenman, 2004.
"Financial Opening and Development: Evidence and Policy Controversies ,"
American Economic Review ,
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Pinto, Brian & Zahir, Farah, 2004.
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