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Financial Liberalization and Inflationary Dynamics: An Open Economy Analysis

  • Rangan Gupta

This paper analyzes the effects of financial liberalization on inflation. We develop an open economy monetary endogenous growth general equilibrium model, 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, which typically had high reserve requirements, the model indicates a positive inflation-financial repression relationship irrespective of 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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Article provided by Taylor & Francis Journals in its journal International Economic Journal.

Volume (Year): 21 (2007)
Issue (Month): 3 ()
Pages: 335-360

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Handle: RePEc:taf:intecj:v:21:y:2007:i:3:p:335-360
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  1. Haslag, Joseph H, 1998. "Monetary Policy, Banking, and Growth," Economic Inquiry, Western Economic Association International, vol. 36(3), pages 489-500, July.
  2. 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).
  3. 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.
  4. Wyplosz, Charles, 1999. "Financial Restraints and Liberalization in Postwar Europe," CEPR Discussion Papers 2253, C.E.P.R. Discussion Papers.
  5. 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.
  6. 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.
  7. 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.
  8. Nouriel Roubini & Xavier Sala-i-Martin, 1991. "Financial Repression and Economic Growth," NBER Working Papers 3876, National Bureau of Economic Research, Inc.
  9. Bacchetta, Philippe & Caminal, Ramon, 1992. "Optimal seigniorage and financial liberalization," Journal of International Money and Finance, Elsevier, vol. 11(6), pages 518-538, December.
  10. Joseph H. Haslag & Jahyeong Koo, 1999. "Financial repression, financial development and economic growth," Working Papers 9902, Federal Reserve Bank of Dallas.
  11. 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.
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