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Welfare and Distributional Impacts of Financial Liberalization in an Open Economy: Lessons from a Multi-Sectoral Dynamic CGE Model for Nepal

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  • Keshab Bhattarai

Abstract

By equalizing rates of return across sectors, financial liberalization improves efficiency and equalizes the distribution of income. Efficiency gained in the allocation of resources increases capital usage more in previously heavily repressed sectors such as agriculture and textile, allowing up to a 19 percent expansion in production and employment. The savings and investment responses, degree of factor substitutions, are higher in the complete liberalization than in partial or piecemeal liberalization. Income, consumption, utility and overall welfare of rural and urban households increase. Liberalization is not effective if savings are used in accumulations of unproductive assets i.e. gold, jewellery, urban land, and foreign exchange. Financial liberalization improves the distribution of income by raising the wage rate of rural labor than for urban labor as rural labour-intensive sectors invest more with increased access to financial institutions and demand more labor to complement additional capital employed in these sectors.

Suggested Citation

  • Keshab Bhattarai, 2017. "Welfare and Distributional Impacts of Financial Liberalization in an Open Economy: Lessons from a Multi-Sectoral Dynamic CGE Model for Nepal," International Business Research, Canadian Center of Science and Education, vol. 10(1), pages 181-198, January.
    • Handle: RePEc:ibn:ibrjnl:v:10:y:2017:i:1:p:181-198
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    Cited by:

    1. Bhattarai, Keshab, 2015. "Constitution, Institutions and A Model for Economic Development in Nepal," MPRA Paper 93261, University Library of Munich, Germany, revised 08 Apr 2019.
    2. Min B. SHRESTHA & Khorshed CHOWDHURY, 2007. "Impact of Financial Liberalization on Welfare: Evidence from Nepal," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 7(1).
    3. Chonlakan Benjasak & Keshab Bhattarai, 2019. "General Equilibrium Impacts of VAT and Corporate Income Tax in Thailand," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 25(3), pages 263-276, August.
    4. Bhattarai, Keshab, 2017. "Impacts of GST reforms on efficiency, growth and redistribution of income in India: A Dynamic CGE Analysis," MPRA Paper 92139, University Library of Munich, Germany.
    5. Keshab Bhattarai & Jonathan Haughton & David G. Tuerck, 2016. "The economic effects of the fair tax: analysis of results of a dynamic CGE model of the US economy," International Economics and Economic Policy, Springer, vol. 13(3), pages 451-466, July.

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    More about this item

    Keywords

    financial intermediation; development; dynamic CGE model; Nepal; growth; redistribution;
    All these keywords.

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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