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


  • Rangan Gupta

    () (Department of Economics, University of Pretoria)


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, 2005. "Financial Liberalization and the Dynamics of Inflation, the Nominal Exchange Rate and the Terms of Trade," Working Papers 200504, University of Pretoria, Department of Economics.
  • Handle: RePEc:pre:wpaper:200504

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    References listed on IDEAS

    1. Guglielmo Maria Caporale & Mario Cerrato, 2008. "Black Market and Official Exchange Rates: Long-run Equilibrium and Short-run Dynamics," Review of International Economics, Wiley Blackwell, vol. 16(3), pages 401-412, August.
    2. Rudiger Dornbusch & Daniel Valente Dantas & Clarice Pechman & Roberto de Rezende Rocha & Demetrio SimÃ…es, 1983. "The Black Market for Dollars in Brazil," The Quarterly Journal of Economics, Oxford University Press, vol. 98(1), pages 25-40.
    3. Lindauer, David L., 1989. "Parallel, fragmented, or black? Defining market structure in developing economies," World Development, Elsevier, vol. 17(12), pages 1871-1880, December.
    4. Granger, Clive W J, 1986. "Developments in the Study of Cointegrated Economic Variables," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 48(3), pages 213-228, August.
    5. Derrese Degefa, 2001. "The Parallel Foreign Exchange Market And Macroeconomic Performance In Ethiopia," Research Papers RP_107, African Economic Research Consortium.
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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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