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Financial Liberalization and Inflationary Dynamics in the Context of a Small Open Economy

Rangan Gupta ()

No 200506, Working Papers from University of Pretoria, Department of Economics

Abstract: The paper develops a short-run model of a small open financially repressed economy characterized by unorganized money markets, intermediate good imports, capital mobility and flexible exchange rates. The analysis shows that financial liberalization, in the form of increased rate of interest on deposits and tight monetary policy causes deflation for an economy with high degree of capital mobility. However, for economies with low degree of capital mobility, the possibility of stagflation cannot be ruled out. The paper recommends financial liberalization in the form of lower reserve requirements for economies with restricted transactions in the capital account.

Keywords: Financial Liberalization; Inflation; Small open economy (search for similar items in EconPapers)
JEL-codes: E31 E44 E52 F41 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2005-10
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