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

Indian Economic Review, 2007, vol. 42, issue 2, pages 165-176

Abstract: 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.

Keywords: Financial Liberalization; Inflation, exchange rate and terms of trade dynamics; Small open economy. (search for similar items in EconPapers)
JEL-codes: E31 E44 E52 F41 (search for similar items in EconPapers)

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