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Real and Financial Sector Interaction Under Liberalization in an Open Developing Economy

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  • Ashima Goyal
  • Shridhar Dash

Abstract

A short-run model incorporates instantaneous portfolio equilibrium with macroeconomic flows to clarify the structure of real-financial sector interactions. If equity and foreign exchange markets are introduced in structuralist theories of asset markets in developing countries, the key result that a fall in money supply raises the rate of inflation now holds only under special conditions on partial derivatives. But there is a tendency for interest rates to rise and for fluctuations in asset prices. Fuller integration of asset markets moderates these fluctuations. Outcomes are stable in spite of the generalized complementarity distinguishing equity markets from loan markets. Expectations play a major role. Implications for policy are to link domestic interest rates to foreign, remove artificial barriers to market integration, and stimulate demand as well as supply.
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Suggested Citation

  • Ashima Goyal & Shridhar Dash, 2000. "Real and Financial Sector Interaction Under Liberalization in an Open Developing Economy," Metroeconomica, Wiley Blackwell, vol. 51(3), pages 257-283, August.
    • Handle: RePEc:bla:metroe:v:51:y:2000:i:3:p:257-283
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    File URL: http://hdl.handle.net/10.1111/1467-999X.00091
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    References listed on IDEAS

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    Cited by:

    1. Goyal, Ashima, 2005. "Puzzles in Indian performance: deficits without disasters," MPRA Paper 29201, University Library of Munich, Germany.

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    More about this item

    JEL classification:

    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • B22 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Macroeconomics
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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