A Generic Model of Financial Repression

Rangan Gupta

No 2005-20, Working papers from University of Connecticut, Department of Economics

Abstract: 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.

Keywords: Financial Repression; Capital Stock and Investment; Unofficial Financial Markets. (search for similar items in EconPapers)
JEL-codes: E22 E26 E44 E52 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2005-06, Revised 2005-07
New Economics Papers: this item is included in nep-dge, nep-ifn, nep-mac and nep-reg
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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Citations: View citations in EconPapers (1)

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