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Financial Liberalization and the Dynamics of Inflation, Nominal Exchange Rate, and Terms of Trade


  • Rangan Gupta

    (Department of Economics, University of Pretoria, Pretoria, South Africa)


The paper develops a short-run structural model of a small open financially repressed economy with current account convertibility. The analysis shows that the effect of financial liberalization on rate of inflation and the movements of the nominal exchange rate proves ambiguous, and hinges critically on the relative responsiveness of the credit-induced effects on aggregate demand and aggregate supply. This result provides a theoretical explanation to the widely available empirical evidence, indicating such an ambiguity.

Suggested Citation

  • Rangan Gupta, 2007. "Financial Liberalization and the Dynamics of Inflation, Nominal Exchange Rate, and Terms of Trade," Indian Economic Review, Department of Economics, Delhi School of Economics, vol. 42(2), pages 165-176, December.
  • Handle: RePEc:dse:indecr:v:42:y:2007:i:2:p:165-176

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    References listed on IDEAS

    1. Majumder, Rajarshi, 2004. "Infrastructure And Regional Development In India," MPRA Paper 4814, University Library of Munich, Germany.
    2. Majumder, Rajarshi, 2003. "Infrastructural Facilities in India: District Level Availability Index," MPRA Paper 4779, University Library of Munich, Germany.
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    More about this item


    Financial Liberalization; Inflation; exchange rate and terms of trade dynamics; Small open economy.;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics


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