Caps or ceilings on interest rates government ownership or control of domestic banks and financial institutions creation or. Financial repression refers to a wide array of policies that allow a government to place its debt with financial institutions at relatively low interest rates. Buttonwood the financialrepression levy finance and. Financial repression is not limited to the banking sector, but the crowding out of corporate loans can be particularly problematic since loans. The term financial repression dates back to work by shaw 1973 and mckinnon 1973 and comprises a range of policies. A generic model of financial repression ideasrepec. But something a little more palatable that has been gaining attention recently is the use of. Financial repression in the european sovereign debt crisis by. The proposed empirical estimate of the revenue from financial repression is based on the difference between the domestic and the foreign cost of borrowing of the government. Financial repression should be at the forefront of every investors lexicon. Public economics, international trade and investment, monetary economics, international finance and macroeconomics this paper presents an analysis of the theoretical underpinnings and the relevance of the phenomenon of financial repression. Bond issuance data is from thomson one banker and loan issuance data is from dealscan.
We show that increased domestic government bond holdings generated a. We identify these effects by exploiting exogenous variation on corporate ratings due to. At the end of 20, the share of government debt held by the domestic banking sectors of eurozone countries was more than twice the amount held in 2007. Total downloads of all papers by victoria ivashina. Pdf financial repression in the european sovereign debt crisis. Financial repression relies on inflation, but it is a steady, stealthy process and therefore much more politically acceptable. Financial repression, in a nutshell, refers to a set of government policies that create an environment of low or negative real interest rates, with the unstated intention of generating cheap funding for government spending. Economic fluctuations and growth program we survey the literatures that study the relation between the trade regime and growth and financial development, financial repression, and growth. This finding is consistent with prior studies, which document that relative to the 20072009 financial crisis, the european sovereign debt crisis has had a substantially more adverse impact on the. Bo and ivashina, victoria, financial repression in the european sovereign debt crisis april 25, 2014. Monetary policy is a powerful lever to achieve this end. Apr 27, 2014 financial repression in the european sovereign debt crisis swedish house of finance research paper no. National research university higher school of economics, moscow corresponding author. We present a model in which such banks cut dollar lending more than euro lending in response to a shock to their credit quality.
Financial repression can increase welfare, since the competitive equilibrium leads to underholding of government bonds. It was successful in helping to reduce the high debt burdens of many countries post world war ii. Finance seminars phdba 239s finance group berkeley haas. Financial repression may not be limited to banks, but the crowding out of bank lending can be particularly problematic since this cannot easily be replaced with other forms of financing. Chinas phenomenal rise since 1978 has resulted from economic. Financial repression is a policy that channels cheap funding to governments, typically supported by accommodative monetary policy. We show that sovereign debt impairments can have a significant impact on financial markets and real economies through a credit ratings channel. This article examines one important aspect of that growth commonly referred to as the east asian miracle public policies affecting the financial markets. Historically, the primary mechanism of financial repression was a discriminatory tax on the part of the financial system that channeled savings toward. For five countries india, mexico, pakistan, sri lanka, and zimbabwe it represented approximately 20% of tax revenue. Financial repression in a model of strategic fiscal and monetary policy interaction pekarski s. My paper paper is closely related to these two studies since it explores how financial repression affects the extension of credit to the private sector. Aug 14, 2012 financial repression should be at the forefront of every investors lexicon.
The return of financial repression financial repression describes any policy measure for example. Money and capital in economic development, originally published 1973, reprint 2010, brookings institution press. The correlations of the revenue from financial repression with inflation, exchange rates and percapita income are discussed. We survey the literatures that study the relation between the trade regime and growth and financial development, financial repression, and growth. Bo becker stockholm school of economics victoria ivashina. However, nancial repression can seldom prevent default entirely, and in the event of default leads banks and households to be strictly worse o. A growth model of inflation, tax evasion, and financial. Financial repression, government revenues and debt liquidation since 2008. The results showed that financial repression exceeded 2% of gdp for seven countries, and greater than 3% for five countries. Financial repression in a model of strategic fiscal and.
This chapter first revises the state of the art on level 3 assets, one of the drivers of fragility for the euro area banking system. Chinas financial repression and alibabas finance plans. Credit cycles, sovereign debt, financial repression. The consequences of financial repression seeking alpha. Financial repression accompanied by entry restrictions enhanced the profitability and thus the stability of financial instifigure 1. Also, policies that aim to stimulate lending by directly providing financial support to the banks e. Dollar funding and the lending behavior of global banks victoria ivashina david s. European authorities have mainly focused on fragility from credit risks, but the global financial crisis highlighted the importance of correctly pricing highly complex and opaque instruments. The effects of financial repression on economic growth in. Stiglitz marilou uy many factors contributed to the rapid growth of the economies of east asia in the past quarter century. The author found that financial repression in combination with inflation played an important role in reducing debts. In section 2, we present a simple growth model of inflation and growth that is an extension of sidrauski 1967 to incorporate tax evasion and financial repression. Financial repression in the european sovereign debt crisis by bo.
Financial markets, public policy, and the east asian miracle joseph e. We use the model to show the effects of financial repression on growth and the public revenue implications of financial repression. Average real deposit rates in selected countries, 197891. In line with reinhart,19 we show that the usa and the euro area have returned to financial repression as implemented during the bretton woods period to reduce debtservicing costs and to finance further crisis measures. Rising debt levels have caused a revival of financial repression in the euro area and the usa. This essay focuses on one important part of financial repression. Sep 24, 2014 chinas financial repression and alibabas finance plans. After the global financial crisis various forms of financial repression have prevailed in most developed and many emerging countries. This cited by count includes citations to the following articles in scholar. Governments do not call these actions financial repression, of course, but characterize them as part of macroprudential regulation, which is designed to ensure the overall health of the financial system. V ivashina, vb nair, a saunders, n massoud, r stover. Stern school of business, melbourne business school, university of melbourne and iowa state university department of accounting and finance. Specifically, we find that firms reduce their investment and reliance on credit markets due to a rising cost of debt capital following a sovereign rating downgrade. A generic model of financial repression rangan gupta.
Your donation today ensures that harvard magazine can continue to provide highquality content and remain an editorially independent source of news about the harvard community. Level 3 assets and sovereign exposure springerlink. Financial repression and economic growth nouriel roubini, xavier salaimartin. Victoria ivashina harvard university financial repression in the european sovereign debt crisis with bo becker, stockholm school of economics pdf for more information about the finance seminars, please contact june wong, faculty assistant, at 5106421499 or email her. Banks holdings of government securities and credit to the. Ending financial repression in china cato institute. December 4, 2004 abstract the paper develops a standard neoclassical growth model in an overlapping generations framework of a.
Stein a large share of dollardenominated lending is done by nonu. The purpose of this paper is to refine the stylized facts regarding financial repression and economic growth in kenya. They therefore recommended that financial conditions should be improved by ending financial repression. Finance is a featured research topic at harvard business school. They found that real rate of interest exerted a positive and significant effect on domestic saving and economic growth. Historically, the primary mechanism of financial repression was a discriminatory tax on the part of the financial system that channels savings to private uses, which results in an artificially low cost of domestic funding. Becker and ivashina 2014 provide a discussion of the plausibility of a range of. Becker, bo and ivashina, victoria, financial repression in the european sovereign. The chief interest being relationship between financial repression and economic growth. Shaw built a model in 1973 to analyze the effect of financial repression on economic growth. Financial repression in the european sovereign debt crisis, in.
The effects of financial repression on economic growth in kenya. Dorn is a china specialist at the cato institute and vice president for academic affairs. The return of financial repression two measures that have been used in some developed markets dms in recent years to ease debt burdens have been spending cuts and tax increases austerity programs, and debt restructuring greece. Jul 12, 2014 financial repression is a policy that channels cheap funding to governments, typically supported by accommodative monetary policy. This can take the form of regulation, direct control of banks, or moral suasion that is, government pressures on banks to.
European corporate loan markets have been exceptionally depressed during the european financial crisis, as evidenced by an unusually high share of bond issues in new corporate credit holding issuer identity fixed. Keeping rates low one of the main goals of financial repression is to keep. Financial repression refers to a wide array of policies that allow a government to. By keeping interest rates low, governments receive cheap funding, and as long as deficits are held in.
The federal reserve directly represses us bond yields and assists in financing the state budget, resulting in an overall liquidation effect from falling bond yields of about three per cent of total government revenues and one per cent of gdp in 2011. There is also recent empirical work which suggests that repression has been under way during the recent euro area crisis becker and ivashina, 2016. Sometimes the debt restructuring is more subtle and takes the form of financial repression. The size of the financial repression tax was computed for 24 emerging markets from 1974 to 1987. The evidence indicates that the revenue from financial repression can be quite substantial, and for several countries it is of the same order of magnitude as seigniorage. Financial repression in the european sovereign debt crisis. Financial repression is an umbrella term originally referring to policies that impede the proper functioning of capital markets, see r. Lse europe in question discussion paper series beyond.
1400 1002 699 429 1003 1265 26 1411 1194 478 1021 1332 433 696 1291 87 259 327 834 1495 1441 1380 1184 726 1373 1186 338 1001 876 1418 1444 157 682 695 474 249 695 1352 692 244 941 1192 1150