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Currency Substitution and Financial Repression

20 September 2012
Author: Rangan Gupta
Publication Type: Working Paper
JEL Code: E31, E44, E63, F43

In this paper, we use a general equilibrium overlapping generations monetary endogenous growth model of a small open economy, to analyze whether financial repression, measured via the ‘high” mandatory reserve-deposit requirements of financial intermediaries, is an optimal response of a consolidated government following an increase in the degree of currency substitution. We find that higher currency substitution can yield higher reserve requirements, but, the result depends crucially on how the consumer weighs money in the utility function relative to domestic and foreign consumptions, and also the size of the government.

Series title: Working Paper 070
1 February 2008
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