Abstract
As austerity policies are unpopular with voters and high debt levels are a drag on growth, several economists, most famously Carmen Reinhart and Kenneth Rogoff, have suggested that governments might have to consider an extra dose of financial repression as a way out of the low growth-high debt trap. I argue that the history of advanced economies under Bretton Woods and the liberalisation experience of the lagging countries suggest that an exit from financially repressive policies is the better alternative to promote growth and the sustainability of government finances.
This is a preview of subscription content, access via your institution.
References
- 1
Financial repression is an umbrella term originally referring to policies that impede the proper functioning of capital markets, see R. McKinnon: Money and Capital in Economic Development, originally published 1973, Reprint 2010, Brookings Institution Press. Since governments typically pursue such policies to achieve fiscal goals, the term “financial repression” is typically used to refer to policies that artificially raise the attractiveness of government bonds. Modern financial repression can take the form of macro-prudential policies, in which government bonds receive preferred treatment (e.g. capital requirement regulation), bond yield caps that are guaranteed by central banks (“Whatever it takes policy?”) or captive regulation (for instance by forcing pension funds to hold a large portfolio of government bonds). The IMF has recently come out to support some forms of prudential regulation formerly known under the umbrella of financial repression.
- 2
C. Reinhart, M. Sbrancia: The Liquidation of Government Debt, IMF Working Paper 15/7, 2015.
- 3
C. Reinhart, V. Reinhart, K. Rogoff: Dealing with Debt, in: Journal of International Economics Vol. 96, Supplement 1, 2015, pp. S43–S55.
- 4
A. Chari, P. Henry: Is the Invisible Hand Discerning or Indiscriminate? Investment and Stock Prices in the Aftermath of Capital Account Liberalizations, NBER Working Paper No. 10318, 2004.
- 5
B. Becker, V. Ivashina: Financial repression in the European Sovereign Debt Crisis, in: Review of Finance, Vol. 22, No. 1, 2017, pp. 83115.
- 6
P. Praet: Speech given by Member of the Executive Board of the ECB, at ECB and Its Watchers XVII conference organised by Center for Financial Studies, Frankfurt, 7 April 2016.
- 7
V. Acharya, S. Steffen: The “Greatest” Carry Trade Ever? Understanding Eurozone Bank Risks, in: Journal of Financial Economics Vol. 115, No. 2, 2015, pp. 215–236.
- 8
J. Buchanan, R. Wagner: Democracy in Deficit: The Legacy of Lord Keynes, Indianapolis 1977, Liberty Fund.
- 9
G. Calvo, C. Reinhart: Fear of Floating, in: Quarterly Journal of Economics, Vol. 107, No. 2, 2002, pp. 379–408
- 9a
C. Reinhart: Goodbye Inflation Targeting, Hello Fear of Floating? Latin America after the Global Financial Crisis, MPRA Working Paper 51282, 2013.
- 10
A. Hoffmann: Zero-Interest Rate Policy and Unintended Consequences in Emerging Markets, in: Vol. 37, No. 10, 2014, pp. 1367–1387.
- 11
A. Steiner: How Central Banks Prepare for Financial Crises - An Empirical Analysis of the Effects of Crises and Globalisation on International Reserves, in: Journal of International Money and Finance, Vol. 33(C), 2013, pp. 208–234.
- 12
R. McKinnon, G. Schnabl: China’s Exchange Rate and Financial Repression: The Conflicted Emergence of the Renminbi as an International Currency, in: China & World Economy, Vol. 22, No. 3, 2016, pp. 1–34.
- 13
A. Hoffmann, A. Loeffler: Low Interest Rate Policy and the Use of Reserve Requirements in Emerging Markets, in: The Quarterly Review of Economics and Finance, Vol. 54, No. 3, 2014, pp. 307–314
- 13a
A. Jara, R. Moreno, C. Tovar: The Global Crisis and Latin America: Financial Impact and Policy Responses, in: BIS Quarterly Review, June 2009, pp. 53–68.
- 14
C. Reinhart, M. Sbrancia, op. cit.
- 15
M. Sbrancia, Fear of Floating, in: Quarterly Journal of Economics, Vol. 107, No. 2, 2002, pp. 379–408 Ibid.
- 16
R. Timberlake: Monetary Policy in the United States, 1993, University of Chicago Press, p. 316.
- 17
S. Homer, R. Sylla: A History of Interest Rates, 3rd ed., 1996, Rutgers University Press, pp. 366–368.
- 18
C. Reinhart, M. Sbancia, op.cit.
- 19
Britain did have foreign exchange restrictions and capital outflow controls from 1947 to 1979 (Reinhart and Sbrancia 2012, op. cit., p. 17). The US accepted these restrictions with regard to the pound when the pound came under depreciation pressure in the Sterling crisis of 1949 but was eager to remove exchange restrictions rapidly for the benefit of international trade and finance. See B. Eichengreen: Globalizing Capital: A History of the International Monetary System, 2008, Princeton University Press.
- 20
J. Baskin, P. Miranti: A History of Corporate Finance, 1st ed. Cambridge (U.K.), New York 1999, Cambridge University Press, pp. 213218.
- 21
Ibid., pp. 243–244. In the 1960s and 1970s, conglomerates emerged. Following developments in portfolio theory, they diversified their firm holdings by buying a number of different firms that could use synergies in the application of techniques for different product lines. The size of these firms allowed them to engage in regulatory arbitrage and improved negotiation power with banks (Ibid., pp. 273–275, 280).
- 22
R. Rajan, L. Zingales: The Great Reversals: The Politics of Financial Development in the Twentieth Century, in: Journal of Financial Economics, Vol. 69, No. 1, 2003, pp. 5–50.
- 23
A. Giovannini, M. de Melo: Government Revenue from Financial Repression, in: The American Economic Review, Vol. 83, No. 4, 1993, pp. 953–963.
- 24
V. Grilli, G.-M. Milesi-Ferretti: Economic Effects and Structural Determinants of Capital Controls, in: IMF Staff Papers, Vol. 42, No. 3, 1995, pp. 517–551.
- 25
R. McKinnon: Money and Capital in Economic Development, in: The Economic Journal, Vol. 84, No. 334, 1974, pp. 422–423.
- 26
F. Buera, Y. Shin: Financial Frictions and the Persistence of History: A Quantitative Exploration, in: Journal of Political Economy, Vol. 121, No. 2, 2013, pp. 221–272.
- 27
R. McKinnon: Spontaneous Order on the Road Back from Socialism: An Asian Perspective, in: The American Economic Review, Vol. 82, No. 2, 1992, pp. 31–36
- 27a
S. Edwards: Sequencing of Reforms, Financial Globalization, and Macroeconomic Vulnerability, in: Journal of the Japanese and International Economies, Vol. 23, No. 2, 2009, pp. 131–148.
- 28
F. Buera, Y. Shin, op.cit.
- 29
T. Sargent, N. Wallace: Some Unpleasant Monetarist Arithmetic, Federal Reserve Bank of Minneapolis, Quarterly Review, 1981.
- 30
B. Steil, M. Hinds: Money, Markets and Sovereignty, 2009, Yale University Press.
Author information
Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Hoffmann, A. Beware of Financial Repression: Lessons from History. Intereconomics 54, 259–266 (2019). https://doi.org/10.1007/s10272-019-0833-0
Published:
Issue Date: