Currency substitution and financial repression

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Authors

Gupta, Rangan

Journal Title

Journal ISSN

Volume Title

Publisher

Routledge

Abstract

In this paper, we use a general equilibrium overlapping generations monetary endogenous growth model of a small open economy, to analyze whether ¯nancial repression, measured via the \high" mandatory reserve-deposit requirements of ¯nancial intermediaries, is an optimal response of a consolidated government following an increase in the degree of currency substitution. We ¯nd that higher currency substitution can yield higher reserve requirements, but, the result depends crucially on how the consumer weighs money in the utility function relative to domestic and foreign consumptions, and also the size of the government.

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Keywords

Currency substitution, Endogenous growth models, Financial repression, Small open economy, Public finance

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Citation

Gupta, R 2011, 'Currency substitution and financial repression', International Economic Journal, vol. 25, no. 1, pp.47-61.