Financial Repression

February 25, 2012 by staff 

Financial Repression, Financial repression is a term used to describe several measures that governments employ to channel funds to themselves, that, in a deregulated market, would go elsewhere. Financial repression can be particularly effective at liquidating debt.

The term financial repression was first introduced in 1973 by Stanford economists Edward S. Shaw and Ronald I. McKinnon. It was used to describe emerging market financial systems in the 1960s-80s. However, the same techniques were also used extensively in developed economies, particularly after World War II and up through the 1980s, when such direct government intervention in markets fell out of favour.

In a 2011 NBER working paper, Carmen Reinhart and Belen Sbrancia speculate on a possible return by governments to this form of debt reduction in order to deal with their high levels of debt following the 2008 economic crisis. Reinhart and Sbrancia characterise financial repression as consisting of the following key elements:

Explicit or indirect capping of, or control over, interest rates, such as on government debt and deposit rates (e.g., Regulation Q).
Government ownership or control of domestic banks and financial institutions with simultaneous placing of barriers before other institutions seeking to enter the market.
Creation or maintenance of a captive domestic market for government debt, achieved by requiring domestic banks to hold government debt via reserve requirements, or by prohibiting or disincentivising alternative options that institutions might otherwise prefer.
Government restrictions on the transfer of assets abroad through the imposition of capital controls.

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