A Generic Model of Financial Repression
The paper develops a growth model in an overlapping generations framework of a financially repressed small open economy, and analyzes the effects of financial liberalization. The following observations are made: An increase (decrease) of interest rate (reserve requirements) reduces (increases) the steady-state stock of capital and the trade balance, but improves (deteriorates) the level of foreign exchange reserves. However, financial liberalization, in any form, is always welfare-improving. The paper, thus, advocates financial liberalization policies to be oriented towards reduction of reserve requirements rather than interest rate deregulation, if foreign reserve holding is not in a critical position.
|Date of creation:||Jun 2005|
|Date of revision:||Jul 2005|
|Note:||This is the first chapter of my dissertation at the University of Connecticut. I am particularly grateful to my major advisor Christian Zimmermann for many helpful comments and discussions. All remaining errors are mine.|
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