| By incorporating financial dualism into an intertemporal general equilibrium model, this study developed a unified theoretical framework to provide a clear understanding of the nature of a financially repressed economy. The effects of financial liberalization policy on key macroeconomic aggregates are examined in a closed-economy setting. The desirability of liberalization policy is also analyzed. If financial repression is the only distortion, interest rate liberalization succeeds not only in producing higher savings, but also in mobilizing loanable funds into regulated financial institutions. Accordingly, it leads to a higher level of welfare. By constrast, the market clearing unregulated money market (UMM) interest rate may rise and the welfare may deteriorate if the required reserve ratio is large and bank reserves are outside money. If, however, the government has a fixed spending requirement, the results of interest rate liberalization is equivalent to the case of that the reserve ratio is zero.; This dissertation, then, attempted to develop a theoretical framework, under more general conditions, for analyzing the intertemporal process of the determination of the market clearing interest rate in the domestic financial market. It is analyzed in great detail that how the equilibrium UMM interest rate responds to a number of real disturbances, including interest rate liberalization, trade liberalization, terms-of-trade shocks, relaxation of capital controls, and fiscal policies. Welfare implications of these real disturbances are also emphasized.; The empirical analysis, as in the case of Korea, provides support for the broad implications of the theoretical analysis. Among the main results it is shown that increases in the nominal administered interest rate, all else equal, have exercised a positive effect on market determined interest rate. However, it was successful in mobilizing loanable funds into regulated financial institutions. Interest rate liberalization with an aid of price stability has resulted ambiguous effect; it depends on the level of reserve ratio. The results also suggest that institutional liberalization played a very important role in enhancing the effectiveness of financial liberalization.; This study provides following implications; (i) A clear understanding of certain characteristics of the domestic financial market at the policy level is necessary for the most appropriate policy design. (ii) Financial liberalization should be coordinated with macroeconomic stability, such as price stability and fiscal discipline. (iii) As a prerequisite for successful financial liberalization, institutional reforms should be emphasized. |
