Real and financial sector interaction under liberalisation in an open developing economy

Goyal, Ashima and Dash, Shridhar (2000): Real and financial sector interaction under liberalisation in an open developing economy. Published in: Meteroeconomica , Vol. 51, No. 3 (2000): pp. 257-283.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: real-financial, portfolio, excess demands, volatility, saddle-stability
• Subjects: O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O11 - Macroeconomic Analyses of Economic Development; B - History of Economic Thought, Methodology, and Heterodox Approaches > B2 - History of Economic Thought since 1925 > B22 - Macroeconomics; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics

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