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An Endogenous Growth Model of a Financially Repressed Small Open Economy

Samrat Goswami () and Rangan Gupta ()

No 200616, Working Papers from University of Pretoria, Department of Economics

Abstract: The paper develops a monetary endogenous growth model of a financially repressed small open economy, characterized by curb markets, capital mobility, transaction costs in domestic and for- eign capital markets, and a flexible exchange rate system, to analyze the impact of financial liberalization– interest rate deregulation and lower multiple reserve requirements, on growth and inflation. When the model is calibrated to match world figures, we find that interest rate deregulation enhances growth and reduces inflation in steady-state. For relatively smaller transaction costs in the curb market, the above result is, however, reversed. Under such circumstances, lowering the transaction costs in the foreign capital market tends to restore the growth-enhancing (inflation- reducing) capabilities of interest rate deregulation. Lower reserve requirements, though, always ensures lower (higher) steady-state inflation (growth).

Keywords: Financial Repression; Growth and Inflation; Unofficial Financial Markets; Monetary Policy (search for similar items in EconPapers)
JEL-codes: E22 E26 E31 E44 E52 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2006-07
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Journal Article: An Endogenous Growth Model of a Financially Repressed Small Open Economy (2009) Downloads
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