An Endogenous Growth Model of a Financially Repressed Small Open Economy

Authors: Goswami, Samrat¹; Gupta, Rangan²

Source: International Economic Journal, Volume 23, Number 1, March 2009 , pp. 143-161(19)

Publisher: Routledge, part of the Taylor & Francis Group

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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).

Keywords: Financial repression; growth and inflation; unofficial financial markets; monetary policy

Document Type: Research article

DOI: http://dx.doi.org/10.1080/10168730802696772

Affiliations: 1: ICFAI Business School Research Center, Kolkata, India 2: Department of Economics, University of Pretoria, South Africa

Publication date: 2009-03-01