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

Ashima Goyal and Shridhar Dash

MPRA Paper from University Library of Munich, Germany

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.

Keywords: real-financial; portfolio; excess demands; volatility; saddle-stability (search for similar items in EconPapers)
JEL-codes: B22 F41 O11 (search for similar items in EconPapers)
Date: 2000-08
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Citations: View citations in EconPapers (1)

Published in Meteroeconomica 3.51(2000): pp. 257-283

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Related works:
Journal Article: Real and Financial Sector Interaction Under Liberalization in an Open Developing Economy (2000)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:23966

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