IDEAS home Printed from https://ideas.repec.org/p/uct/uconnp/2005-39.html
   My bibliography  Save this paper

Financial Liberalization and Inflationary Dynamics in the Context of a Small Open Economy

Author

Listed:
  • Rangan Gupta

    (University of Connecticut and University of Pretoria)

Abstract

The paper develops a short-run model of a small open financially repressed economy characterized by unorganized money markets, capital good imports, capital mobility, wage indexation, and flexible exchange rates. The analysis shows that financial liberalization, in the form of an increased rate of interest on deposits and tight monetary policy, unambiguously and unconditionally causes deflation. Moreover, the results do not depend on the degree of capital mobility and structure of wage setting. The paper recommends that a small open developing economy should deregulate interest rates and tighten monetary policy if reducing inflation is a priority. The pre-requisite for such a policy, however, requires the establishment of a flexible exchange rate regime.

Suggested Citation

  • Rangan Gupta, 2005. "Financial Liberalization and Inflationary Dynamics in the Context of a Small Open Economy," Working papers 2005-39, University of Connecticut, Department of Economics.
    • Handle: RePEc:uct:uconnp:2005-39
    Note: This is a revised version of a paper that was written as a part of my coursework in Monetary Theory and Policy at the University of Connecticut. I am particularly grateful to Professor Stephen M. Miller for many helpful comments.
    as

    Download full text from publisher

    File URL: https://media.economics.uconn.edu/working/2005-39.pdf
    File Function: Full text
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Sweder van Wijnbergen, 1986. "Exchange Rate Management and Stabilization Policies in Developing Countries," NBER Chapters, in: Economic Adjustment and Exchange Rates in Developing Countries, pages 17-42, National Bureau of Economic Research, Inc.
    2. Van Wijnbergen, S., 1985. "Macro-economic effects of changes in bank interest rates : Simulation results for South Korea," Journal of Development Economics, Elsevier, vol. 18(2-3), pages 541-554, August.
    3. Van Wijnbergen, S., 1983. "Interest rate management in LDC's," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 433-452, September.
    4. Ranjanendra Narayan Nag, 2000. "Stabilization Dynamics and Non Bank Financial Intermediaries," Indian Economic Review, Department of Economics, Delhi School of Economics, vol. 35(2), pages 193-209, July.
    5. van Wijnbergen, S., 1982. "Stagflationary effects of monetary stabilization policies : A quantitative analysis of South Korea," Journal of Development Economics, Elsevier, vol. 10(2), pages 133-169, April.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Rangan Gupta & Philton Makena, 2020. "Growth Dynamics, Multiple Equilibria, and Local Indeterminacy in an Endogenous Growth Model of Money, Banking and Inflation Targeting," Economies, MDPI, vol. 8(1), pages 1-14, March.
    2. Rangan Gupta, 2005. "A Generic Model of Financial Repression," Working papers 2005-20, University of Connecticut, Department of Economics, revised Jul 2005.
    3. Laeven, Luc, 2000. "Does financial liberalization relax financing constraints on firms ?," Policy Research Working Paper Series 2467, The World Bank.
    4. Ma, Chien-Hui & Smith, Bruce D., 1996. "Credit market imperfections and economic development: Theory and evidence," Journal of Development Economics, Elsevier, vol. 48(2), pages 351-387, March.
    5. Shaheen, Safana & Awan, Masood Sarwar & Waqas, Muhammad & Aslam, Muhammad Amir, 2011. "Financial Development, International Trade and Economic Growth: Empirical Evidence from Pakistan," MPRA Paper 32876, University Library of Munich, Germany.
    6. Ghura, Dhaneshwar, 1995. "Effects of macroeconomic policies on income growth, inflation, and output growth in Sub-Saharan Africa," Journal of Policy Modeling, Elsevier, vol. 17(4), pages 367-395, August.
    7. A. E. Akinlo & A. F. Odusola, 2003. "Assessing the impact of Nigeria's naira depreciation on output and inflation," Applied Economics, Taylor & Francis Journals, vol. 35(6), pages 691-703.
    8. Van Wijnbergen, Sweder, 1986. "Exchange rate management and stabilization policies in developing countries," Journal of Development Economics, Elsevier, vol. 23(2), pages 227-247, October.
    9. Konstantinos Loizos, 2018. "The Financial Repression†Liberalization Debate: Taking Stock, Looking For A Synthesis," Journal of Economic Surveys, Wiley Blackwell, vol. 32(2), pages 440-468, April.
    10. Willems, Tim, 2013. "Analyzing the effects of US monetary policy shocks in dollarized countries," European Economic Review, Elsevier, vol. 61(C), pages 101-115.
    11. James B. Ang, 2008. "A Survey Of Recent Developments In The Literature Of Finance And Growth," Journal of Economic Surveys, Wiley Blackwell, vol. 22(3), pages 536-576, July.
    12. Jiangang Peng & Nicolaas Groenewold & Xiangmei Fan, 2008. "Financial-System Reform and Economic Growth in a Transition Economy: The Case of China, 1978-2004," Economics Discussion / Working Papers 08-01, The University of Western Australia, Department of Economics.
    13. Dua Pami & Rashid Aneesa Ismail & Salvatore Dominick, 2000. "The Impact of Financial and Fiscal Variables on Economic Growth: The Case of India and Korea," International Economic Journal, Taylor & Francis Journals, vol. 14(2), pages 133-150.
    14. Jiangang Peng & Nicolaas Groenewold & Jing He & Zhangfei Li & Yu Yi, 2008. "Regional Finance and Regional Disparities in China," Economics Discussion / Working Papers 08-02, The University of Western Australia, Department of Economics.
    15. Roman Frydman & Michael Goldberg, 2015. "Change and Rationality in Macroeconomics and Finance Theory: A New Rational Expectations Hypothesis," Working Papers Series 8, Institute for New Economic Thinking.
    16. Balassa, Bela, 1989. "Financial liberalization in developing countries," Policy Research Working Paper Series 55, The World Bank.
    17. Mamoon, Dawood & Nicholas, Howard, 2017. "Financial Liberalisation and Economic Growth: A Preliminary Analysis," MPRA Paper 82976, University Library of Munich, Germany.
    18. I.Igal Magendzo, 2002. "Are Devaluations Really Contractionary?," Working Papers Central Bank of Chile 182, Central Bank of Chile.
    19. repec:phd:pjdevt:jpd_1990_vol__xvii_no__2-d is not listed on IDEAS
    20. OUNIR, Abdessamad, 2012. "Libéralisation financière et investissement des entreprises marocaines [Financial liberalization and investment of the Moroccan firms]," MPRA Paper 71798, University Library of Munich, Germany, revised 2012.
    21. Demetriades, Panicos O. & Hussein, Khaled A., 1996. "Does financial development cause economic growth? Time-series evidence from 16 countries," Journal of Development Economics, Elsevier, vol. 51(2), pages 387-411, December.

    More about this item

    Keywords

    Financial Liberalization; Inflation; Small open economy.;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:uct:uconnp:2005-39. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Mark McConnel (email available below). General contact details of provider: https://edirc.repec.org/data/deuctus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.