An endogenous growth model of a financially repressed small open economy

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Authors

Goswami, Samrat

Journal Title

Journal ISSN

Volume Title

Publisher

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 foreign 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).

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Keywords

Financial repression, Growth, Inflation, Unofficial financial markets, Monetary policy

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Citation

Goswami, S & Gupta, R 2006, 'An endogenous growth model of a financially repressed small open economy', University of Pretoria, Department of Economics, Working paper series, no. 2006-16. [http://web.up.ac.za/default.asp?ipkCategoryID=736&sub=1&parentid=677&subid=729&ipklookid=3]