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Financial Liberalization and Inflationary Dynamics

  • Rangan Gupta

    (University of Connecticut and University of Pretoria)

The paper analyzes the effects of financial liberalization on inflation. We develop a monetary and endogenous growth, dynamic general equilibrium model with financial intermediaries 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 a positive inflation-financial repression relationship irrespective of the the specification of preferences. But the strength of the relationship obtained from the model is found to be much smaller in size than the corresponding empirical estimates.

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File URL: http://web2.uconn.edu/economics/working/2005-31.pdf
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Paper provided by University of Connecticut, Department of Economics in its series Working papers with number 2005-31.

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Length: 26 pages
Date of creation: Jul 2005
Date of revision:
Handle: RePEc:uct:uconnp:2005-31
Note: This is a revised version of the second 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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Web page: http://www.econ.uconn.edu/
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  1. Christian Zimmermann, 1994. "Technology Innovations and the Volatility of Output: An International Perspective," Cahiers de recherche CREFE / CREFE Working Papers 34, CREFE, Université du Québec à Montréal.
  2. Nouriel Roubini & Xavier Sala-i-Martin, 1991. "Financial Repression and Economic Growth," NBER Working Papers 3876, National Bureau of Economic Research, Inc.
  3. Bacchetta, Philippe & Caminal, Ramon, 1992. "Optimal seigniorage and financial liberalization," Journal of International Money and Finance, Elsevier, vol. 11(6), pages 518-538, December.
  4. Correia, I. & Rabelo, S. & Naves, J.C., 1994. "Business Cycles in a Small Open Economy," RCER Working Papers 382, University of Rochester - Center for Economic Research (RCER).
  5. V.V. Chari & Larry E. Jones & Rodolfo E. Manuelli, 1995. "The growth effects of monetary policy," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 18-32.
  6. Marco Espinosa & Chong K. Yip, 1996. "An endogenous growth model of money, banking, and financial repression," Working Paper 96-4, Federal Reserve Bank of Atlanta.
  7. Haslag, Joseph H, 1998. "Monetary Policy, Banking, and Growth," Economic Inquiry, Western Economic Association International, vol. 36(3), pages 489-500, July.
  8. Joseph H. Haslag & Eric R. Young, 1998. "Money Creation, Reserve Requirements, and Seigniorage," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(3), pages 677-698, July.
  9. Joseph H. Haslag & Scott E. Hein, 1990. "Does it matter how monetary policy is implemented?," Research Paper 9009, Federal Reserve Bank of Dallas.
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