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Financial Liberalization and Inflationary Dynamics: An Open Economy Analysis

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  • Rangan Gupta

    (University of Connecticut and University of Pretoria)

Abstract

The paper analyzes the effects of financial liberalization on inflation. We develop a monetary and endogenous growth, dynamic general equilibrium model of a small open semi-industrialized economy, with financial intermediaries subjected to obligatory "high" reserve ratio, serving as the source of financial repression. When calibrated to four Southern European semi-industrialized countries, namely Greece, Italy, Spain and Portugal, that typically had high reserve requirements, the model indicates a positive inflation-financial repression relationship irrespective of the the specification of preferences. But the strength of the relationship obtained from the model is found to be much smaller in size than the corresponding empirical estimates.

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Bibliographic Info

Paper provided by University of Connecticut, Department of Economics in its series Working papers with number 2005-32.

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Length: 31 pages
Date of creation: Jul 2005
Date of revision:
Handle: RePEc:uct:uconnp:2005-32

Note: This is a revised version of the third chapter of my dissertation at the University of Connecticut. I am particularly grateful to my major advisor Christian Zimmermann for many helpful comments and discussions. All remaining errors are mine.
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Web page: http://www.econ.uconn.edu/
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Keywords: Inflation; Financial Markets and the Macroeconomy;

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References

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  1. Nouriel Roubini & Xavier Sala-i-Martin, 1991. "Financial Repression and Economic Growth," NBER Working Papers 3876, National Bureau of Economic Research, Inc.
  2. Joseph H. Haslag & Jahyeong Koo, 1999. "Financial repression, financial development and economic growth," Working Papers 9902, Federal Reserve Bank of Dallas.
  3. Correia, I. & Rabelo, S. & Naves, J.C., 1994. "Business Cycles in a Small Open Economy," RCER Working Papers 382, University of Rochester - Center for Economic Research (RCER).
  4. Haslag, Joseph H, 1998. "Monetary Policy, Banking, and Growth," Economic Inquiry, Western Economic Association International, vol. 36(3), pages 489-500, July.
  5. Bacchetta, Philippe & Caminal, Ramon, 1992. "Optimal seigniorage and financial liberalization," Journal of International Money and Finance, Elsevier, vol. 11(6), pages 518-538, December.
  6. Christian Zimmermann, 1994. "Technology Innovations and the Volatility of Output: An International Perspective," Cahiers de recherche CREFE / CREFE Working Papers 34, CREFE, Université du Québec à Montréal.
  7. Ranjanendra Narayan Nag, 2000. "Stabilization Dynamics and Non Bank Financial Intermediaries," Indian Economic Review, Department of Economics, Delhi School of Economics, vol. 35(2), pages 193-209, July.
  8. Wyplosz, Charles, 1999. "Financial Restraints and Liberalization in Postwar Europe," CEPR Discussion Papers 2253, C.E.P.R. Discussion Papers.
  9. V.V. Chari & Larry E. Jones & Rodolfo E. Manuelli, 1995. "The growth effects of monetary policy," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 18-32.
  10. Sung Jin Kang & Yasuyuki Sawada, 2001. "Financial repression and external openness in an endogenous growth model," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 9(4), pages 427-443.
  11. Boileau, Martin, 1999. "Trade in capital goods and the volatility of net exports and the terms of trade," Journal of International Economics, Elsevier, vol. 48(2), pages 347-365, August.
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Cited by:
  1. Rashid, Abdul, 2010. "Testing for nonlinear causation between capital inflows and domestic prices," MPRA Paper 26082, University Library of Munich, Germany.

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