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An Endogenous Growth Model of a Financially Repressed Small Open Economy

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Author Info

  • Samrat Goswami

    ()
    (ICFAI Business School Research Center)

  • Rangan Gupta

    ()
    (Department of Economics, University of Pretoria)

Abstract

The paper develops a monetary endogenous growth model of a financially repressed small open economy, characterized by curb markets, capital mobility, transaction costs in domestic and for- eign capital markets, and a flexible exchange rate system, to analyze the impact of financial liberalization– interest rate deregulation and lower multiple reserve requirements, on growth and inflation. When the model is calibrated to match world figures, we find that interest rate deregulation enhances growth and reduces inflation in steady-state. For relatively smaller transaction costs in the curb market, the above result is, however, reversed. Under such circumstances, lowering the transaction costs in the foreign capital market tends to restore the growth-enhancing (inflation- reducing) capabilities of interest rate deregulation. Lower reserve requirements, though, always ensures lower (higher) steady-state inflation (growth).

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Bibliographic Info

Paper provided by University of Pretoria, Department of Economics in its series Working Papers with number 200616.

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Length: 26 pages
Date of creation: Jul 2006
Date of revision:
Handle: RePEc:pre:wpaper:200616

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Keywords: Financial Repression; Growth and Inflation; Unofficial Financial Markets; Monetary Policy;

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