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An endogenous growth model of money, banking, and financial repression

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  • Marco A. Espinosa-Vega
  • Chong K. Yip

Abstract

In this paper, we develop an endogenous growth model with financial intermediation to examine the effects of financial repression on growth, inflation, and welfare. By limiting the liquidity provision, binding reserve requirements always suppress economic growth while their effect on inflation is a function, among other things, of the degree of repression. For example, contrary to previous claims, if financial repression is severe enough so that an informal financial sector emerges, liberalization is inflationary. Notwithstanding, liberalization in these cases is always welfare improving. Finally, we characterize the condition that gives rise to a unique optimal level of binding reserve requirements, i.e., the optimal degree of \"moderate\" financial repression.

Suggested Citation

  • Marco A. Espinosa-Vega & Chong K. Yip, 1996. "An endogenous growth model of money, banking, and financial repression," FRB Atlanta Working Paper 96-4, Federal Reserve Bank of Atlanta.
    • Handle: RePEc:fip:fedawp:96-4
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    File URL: https://www.frbatlanta.org/-/media/documents/research/publications/wp/1996/wp964.pdf
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    Citations

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    Cited by:

    1. Hernando Vargas H., 1996. "Apertura, encajes e intermediación financiera," Revista ESPE - Ensayos sobre Política Económica, Banco de la Republica de Colombia, vol. 15(30), pages 5-40, December.
    2. Andres, Javier & Hernando, Ignacio & Lopez-Salido, J. David, 2004. "The role of the financial system in the growth-inflation link: the OECD experience," European Journal of Political Economy, Elsevier, vol. 20(4), pages 941-961, November.
    3. Espinosa-Vega, Marco A & Yip, Chong K, 1999. "Fiscal and Monetary Policy Interactions in an Endogenous Growth Model with Financial Intermediaries," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(3), pages 595-615, August.
    4. Rangan Gupta, 2005. "Costly State Monitoring and Reserve Requirements," Annals of Economics and Finance, Society for AEF, vol. 6(2), pages 263-288, November.
    5. Rangan Gupta & Philton Makena, 2020. "Growth Dynamics, Multiple Equilibria, and Local Indeterminacy in an Endogenous Growth Model of Money, Banking and Inflation Targeting," Economies, MDPI, vol. 8(1), pages 1-14, March.
    6. Rangan Gupta, 2005. "Financial Liberalization and Inflationary Dynamics," Working papers 2005-31, University of Connecticut, Department of Economics.

    More about this item

    Keywords

    Financial markets; Money theory;

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