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Real and financial sector interaction under liberalisation in an open developing economy

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  • Goyal, Ashima
  • Dash, Shridhar

Abstract

A short-run model incorporates instantaneous portfolio equilibrium with macroeconomic flows to clarify the structure of real-financial sector interactions. If equity and foreign exchange markets are introduced in structuralist theories of asset markets in developing countries, the key result that a fall in money supply raises the rate of inflation now holds only under special conditions on partial derivatives. But there is a tendency for interest rates to rise and for fluctuations in asset prices. Fuller integration of asset markets moderates these fluctuations. Outcomes are stable in spite of the generalized complementarity distinguishing equity markets from loan markets. Expectations play a major role. Implications for policy are to link domestic interest rates to foreign, remove artificial barriers to market integration, and stimulate demand as well as supply.

Suggested Citation

  • Goyal, Ashima & Dash, Shridhar, 2000. "Real and financial sector interaction under liberalisation in an open developing economy," MPRA Paper 23966, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:23966
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    References listed on IDEAS

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    6. van Wijnbergen, Sweder, 1983. "Credit policy, inflation and growth in a financially repressed economy," Journal of Development Economics, Elsevier, vol. 13(1-2), pages 45-65.
    7. Ashima Goyal, 1997. "Sticky Relative Prices, Dynamics, and the Closure Debate," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 19(2), pages 195-224, January.
    8. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, April.
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    Cited by:

    1. Goyal, Ashima, 2005. "Puzzles in Indian performance: deficits without disasters," MPRA Paper 29201, University Library of Munich, Germany.

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    More about this item

    Keywords

    real-financial; portfolio; excess demands; volatility; saddle-stability;
    All these keywords.

    JEL classification:

    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • B22 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Macroeconomics
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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