Revisiting the Inflation-Repression Relationship
The paper analyzes the effects of financial liberalization on steady-state inflation. We develop an overlapping generations model with endogenous growth where financial intermediaries are subjected to obligatory `high' cash reserves requirement, serving as the source of financial repression. When calibrated to four Southern European semi-industrialized countries, namely Greece, Italy, Spain and Portugal, that typically had high reserve requirements, the model indicates that the sign of the inflation-financial repression relationship depends crucially on the elasticity of substitution between the cash and credit goods consumed in the economy.
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