Aspects of Financial Reforms In the Presence of Product Market Imperfection

In this paper we construct a dynamic general equilibrium model to analyse different aspects of financial reforms in a two sector closed economy. Market structure in one of the sectors is perfectly competitive, while the other sector is monopolistically competitive. The perfectly competitive firms do not have access to the equity markets, whereas the imperfectly competitive firms finance their fixed cost needs through the equity market and operate under increasing returns to scale. Both types of firms depend on the banks for working capital finance. Financial reform is modeled as a one shot process of either increasing the efficiency of the equity market or decreasing the cash-reserve ratio of the banks. We analyse a steady state solution of the dynamic structure. Simulation exercises with alternative plausible parametric specifications regarding capital and labour intensities in the production process throw light on the issues of brand proliferation (emergence of new firms) and relative impact on the two sectors, following the initiation of a financial reform programme.