Imperfect Competition in Financial Markets and Capital Controls: A Model and a Test.

Pasricha, Gurnain Kaur (2008): Imperfect Competition in Financial Markets and Capital Controls: A Model and a Test.

Abstract

This paper explores the implications of financial repression, specifically, imperfect competition in the financial sector and capital controls for equilibrium interest rates and current account imbalances; and the implications of liberalization. I find that (1) interest differentials between home and foreign markets exist and are higher the fewer the number of domestic financial institutions (2) liberalization of the domestic financial sector - i.e. increasing the number of players - exacerbates current account imbalances in growing economies and reduces revenues from repression (3) revenues from financial repression decline when capital controls become porous (which may be a consequnce of trade liberalization), making liberalization of domestic financial sector more palatable to the domestic governments. An empirical exercise validates several predictions of the model.

• Item Type: MPRA Paper
• Language: English
• Keywords: Financial Repression; Capital Controls; Imperfect Competition in Financial Markets; Domestic Financial Liberalization; Interest Differentials
• Subjects: F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance; F - International Economics > F3 - International Finance > F32 - Current Account Adjustment ; Short-Term Capital Movements; D - Microeconomics > D4 - Market Structure, Pricing, and Design > D43 - Oligopoly and Other Forms of Market Imperfection

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