Abstract:
In this paper, we use a general equilibrium overlapping generations monetary endogenous growth
model of a small open economy, to analyze whether financial repression, measured via the "high"
mandatory reserve-deposit requirements of financial intermediaries, is an optimal response of a
consolidated government following an increase in the degree of currency substitution. We find
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.
