scholarly journals Financial liberalisation and inflationary dynamics in the context of a small open economy

2014 ◽  
Vol 9 (1) ◽  
pp. 89-101
Author(s):  
R Gupta
Keyword(s):  
Open Economy ◽  
Capital Mobility ◽  
Small Open Economy ◽  
Capital Account ◽  
Short Term ◽  
Money Markets ◽  
Reserve Requirements ◽  
Low Degree ◽  
Financial Liberalisation ◽  
High Degree

This paper develops a short-term model of a small open financially repressed economy characterised by unorganised money markets, intermediate goods imports, capital mobility and flexible exchange rates. The analysis shows that financial liberalisation, in the form of increased rate of interest on deposits and tight monetary policy, causes deflation for an economy with a high degree of capital mobility. However, for economies with a low degree of capital mobility, the possibility of stagflation cannot be ruled out. These results suggest that financial liberalisation in the form of lower reserve requirements should be recommended for economies with restricted transactions in the capital account.

scholarly journals Status Preference, Wealth and Dynamics in the Open Economy

2004 ◽  
Vol 5 (3) ◽  
pp. 335-355 ◽  
Author(s):  
Walter H. Fisher
Keyword(s):  
Open Economy ◽  
Capital Mobility ◽  
Critical Role ◽  
Government Expenditure ◽  
Small Open Economy ◽  
Current Account Balance ◽  
Financial Assets ◽  
Transitional Dynamics ◽  
Economy Model ◽  
Interest Rate Shocks

Abstract The implications of status preference in a simple open economy model are investigated in this paper. The open economy is modeled as a continuum of identical representative agents who have preferences over consumption and status. In the paper status is identified as relative wealth, which takes the form of relative holdings international financial assets. A symmetric macroeconomic equilibrium is derived in which status is the source of transitional dynamics for domestic consumption and the current account balance. This result illustrates another way to combine transitional dynamics with interior equilibria in the small open economy Ramsey model with perfect capital mobility. We also show that status preference plays a critical role in influencing the open economy’s adjustment to government expenditure and world interest rate shocks.

scholarly journals Wage rigidity and capital mobility in an optimizing model of a small open economy

De Economist ◽  
1989 ◽  
Vol 137 (1) ◽  
pp. 47-75
Author(s):  
Th. van de Klundert ◽  
F. van der Ploeg
Keyword(s):  
Open Economy ◽  
Capital Mobility ◽  
Small Open Economy ◽  
Wage Rigidity ◽  
Optimizing Model

scholarly journals Capital Flow Management Measures and Dollarization

2020 ◽  
Author(s):  
Eugenia Andreasen ◽  
Victoria Nuguer
Keyword(s):  
Financial Market ◽  
Open Economy ◽  
Foreign Currency ◽  
Theoretical Perspective ◽  
Small Open Economy ◽  
Flow Management ◽  
Economy Model ◽  
Reserve Requirements ◽  
Management Measures ◽  
Financial Dollarization

This paper studies from an empirical and theoretical perspective the systemic and bank-level effects of imposing reserve requirements (RR) in foreign currency in an economy with a heavily dollarized financial system. The paper empirically characterizes banks responses to the RR carried out by the Peruvian Central Bank since 2008 with the objective of stabilizing the financial market and meeting its policy targets. The results suggest that the RR is effective in reducing the overall level of credit in the economy and that banks response in terms of credit and deposits is very heterogeneous depending on their ex ante preference for foreign funding ratio, i.e., the ratio of deposits in dollars to total loans. Motivated by the empirical insights, the paper builds a DSGE small-open-economy model with financial frictions à la Gertler-Karadi-Kiyotaki, where bank heterogeneity and financial dollarization are introduced to evaluate the effectiveness of the differential RR in reducing financial dollarization and improving financial resilience.

Interest rate rules and equilibrium (in)determinacy in a small open economy: the role of internationally traded capital

2018 ◽  
Vol 18 (2) ◽  
Author(s):  
Wen-ya Chang ◽  
Hsueh-fang Tsai ◽  
Juin-jen Chang ◽  
Hsieh-yu Lin
Keyword(s):  
Interest Rate ◽  
Open Economy ◽  
Capital Mobility ◽  
Small Open Economy ◽  
International Capital ◽  
Interest Rate Rules ◽  
International Capital Mobility ◽  
Rate Feedback ◽  
Feedback Rule

Abstract This study develops a small-open-economy version of Benhabib, J., S. Schmitt-Grohé, and M. Uribe. 2001. “Monetary Policy and Multiple Equilibria.” American Economic Review 91: 167–186. We systematically explore the role of international capital mobility and the portfolio balance channel in terms of macroeconomic (in)stability when the government follows a commonly-adopted interest-rate feedback rule. In a one-traded-good model, the steady-state equilibrium, in general, is locally determinate; international capital mobility stabilizes the economy against business cycle fluctuations under a simple interest-rate feedback rule. In a two-good (traded and non-traded goods) model, the relationship between equilibrium (in)determinacy and the aggressiveness of interest rate rules is not monotonic, and crucially depends on households’ portfolio preferences. These results suggest that a unified interest rate rule can end up with very different consequences of macroeconomic (in)stability in an open economy from those in a closed economy.

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