Real and Financial Sector Interaction Under Liberalization in an Open Developing Economy

Posted: 10 Aug 2000

See all articles by Shridhar Dash

Shridhar Dash

Indira Gandhi Institute of Development Research (IGIDR)

Ashima Goyal

Indira Gandhi Institute of Development Research (IGIDR)

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.

JEL Classification: O11, O16

Suggested Citation

Dash, Shridhar and Goyal, Ashima, Real and Financial Sector Interaction Under Liberalization in an Open Developing Economy. Available at SSRN: https://ssrn.com/abstract=236276

Shridhar Dash (Contact Author)

Indira Gandhi Institute of Development Research (IGIDR) ( email )

Gen A.K. Vaidya Marg Santoshnagar
Goregaon (East)
Bombay 400065, Maharashtra
India

Ashima Goyal

Indira Gandhi Institute of Development Research (IGIDR) ( email )

Gen A.K. Vaidya Marg Santoshnagar
Goregaon (East)
Bombay 400065, Maharashtra
India
+91 22 28400920 (Phone)
+91 22 28402752 (Fax)

HOME PAGE: http://www.igidr.ac.in/~ashima

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