E6,f3,n0 abstract there is a rich scholarly literature on sovereign default on external debt. As reinhart and rogoff 2014 point out, before world war ii, the outright writedown of debt in advanced countries was common and consequential. Liberalization years s in italics turkey 198082 and 1987 onwards. Reinhart, peterson institute for international economics oped on. The technical term for this is financial repression. Iwmgetty imagesiwm via getty images for carmen reinhart and ken rogoff, 20. The term financial repression is frequently employed as a pejorative to criticize particular policies, evoking strong reactions in academic and policy discussions. Consistent negative real interest rates are equivalent to a tax on bond holders and, more generally, savers. 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. This effect, other things being equal, reduces governments interest expenses for a given stock of debt and contributes to. Financial repression redux munich personal repec archive. Financial regulation and government revenue been performed by brock 1984, 1989, and recently ag enor and montiel 2008, who also focus on the gains generated by imposing large reserve requirements and an in ation tax.
Ive been getting questions about carmen reinharts new paper on financial repression pdf in the aftermath of large debt buildups, which asserts that said repression was a large part of the way the us and uk, in particular, dealt with their war debts on a first read, i have some problems with the methodology, which is based on lopping off any years in which the real interest rate on. Lambert, 2014 financial repression relies on inflation, but it is a steady, stealthy process and therefore much more. For the advanced economies, real interest rates were. The rst is that nancial repression has been extensively used by government as a tool to reduce the burden of government debt in the post wwii era as documented by reinhart and sbrancia. In the united states, as in europe, at present, this means consistent negative real interest rates. Financial repression was most successful in liquidating debts when accompanied by a steady dose of inflation. But debt is also reduced through financial repression, a tax on bondholders and savers via negative or below. Ive been getting questions about carmen reinhart s new paper on financial repression pdf in the aftermath of large debt buildups, which asserts that said repression was a large part of the way the us and uk, in particular, dealt with their war debts on a first read, i have some problems with the methodology, which is based on lopping off any years in which the real interest rate on. Mar 11, 2012 however, when financial repression produces negative real interest rates and reduces or liquidates existing debts, it is a transfer from creditors savers to borrowers and, in some cases. May 25, 2012 periods of high indebtedness have historically been associated with a rising incidence of default or restructuring of public and private debts. Belen sbrancia, was published by the national bureau of. Reinhart, university of maryland, cepr, and nber federal resrve bank of san francisco march 5, 2010. However, since the financial crisis hit hard in 2008, there has been a resurgence of interest in how governments have paid down massive debt burdens in the past, and a fascinating study of financial repression, the liquidation of government debt, authored by carmen reinhart and m.
This essay focuses on one important form of repression. The benefits of financial repression why do countries have financial repression. This essay focuses on one important part of financial repression. Such policies, known as financial repression, usually involve a strong connection between the government, the central bank, and the financial sector. The resurgence of financial repression in the wake of the 20072009 financial crises. Sometimes the debt restructuring is more subtle and takes the form of financial repression. The beneficiaries of financial repression historically, financial repression has been found to play an important role in reducing public debttogdp ratios in many advanced economies, especially after world war ii, according to a study by reinhart and sbrancia 2011. I argue that the history of advanced economies under bretton woods and the. Subsequently, the term became a way of describing emergingmarket financial systems prior to the widespread financial liberalization that began in the 1980 see agenor and montiel, 2008, for an excellent discussion. Financial repression refers to a set of governmental policies that keep real interest rates low or negative and regulate or manipulate a captive audience into investing in government debt. The resurgence of financial repression in the wake of the 20072009 financial crises alongside the. Financial repression refers to a wide array of policies that allow a government to.
After the second world war, financial repression was the weapon of choice for heavily indebted countries. Jan 18, 2020 financial repression is a term that describes measures by which governments channel funds to themselves as a form of debt reduction. Reinhart and rogoffs latest paper warns on financial repression. Liberalization initiated in 1980 but reversed by 1982. Keeping rates low one of the main goals of financial repression is to keep.
Investment increases, productive capacity increases fasterowners of capital are implicitly subsidized by savers, exports increase, and governments pay lower debt interest costs. First, in line with the view espoused by reinhart et al. Pdf financial repression has come back to stay carmen m. Adding further trouble is the interchangeable use by some scholars of terms like fiscal repression with financial repression, sometimes in the same paper. Sometimes the debt restructuring is subtle and takes the form of, financial repression. Sometimes the debt restructuring is subtle and takes the form of,financial repression. In terms of optimality of nancial repression and seigniorage taxes, bacchetta and caminal 1992 analyze the. In the heavily regulated financial markets of the bretton woods system, a variety of. Facing the challenges of new information and communication technologies in social.
The size of the financial repression tax was computed for 24 emerging markets from 1974 to 1987. The impacts in the aftermath went beyond bailout costs and stimulus packagesrevenues implode. Pdf periods of high indebtedness have historically been associated with. Reinhart, miguel angel santos, from financial repression to external distress. Reinhart and conference participants for helpful comments and suggestions. Reinhart explains that debt crises lead to financial repression, which can take different forms, with some alternatives having better outcomes than others. Financial repression played an important role in reducing debttogdp ratios after world war ii by keeping real interest rates for government debt below 1% for twothirds of the time between 1945 and 1980, the united states was able to inflate away the large debt 122% of gdp left over from the great depression and world war ii. Moreover, governments are inclined to generate revenue typically from financial repression in order to service their debt reinhart, 2012, which can affect mnes incentives to interact with host. Deep financial crises had major adverse consequences for government finances. To control capital, governments force citizens to suffer more national debt.
Reinhart and miguel angel santos nber working paper no. Financial repression myth, metaphor and reality opendemocracy. The results showed that financial repression exceeded 2% of gdp for. They implement financial repression by keeping interest. The first of these approaches follows reinhart and sbrancia 2011 and 2015 and decomposes the expost real returns on domestic debt into the unexpected inflation and exante financial repression components. However, when financial repression produces negative real interest rates and reduces or liquidates existing debts, it is a transfer from creditors savers to borrowers and, in some cases. Reinhart and rogoffs latest paper warns on financial. The return of financial repression, reinhart financial repression tax estimates country period % gdp p. 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. Few people are aware of how widespread financial repression is. Monetary policy, leverage cycles, and financial crises, 18702008 by moritz schularick and alan m.
Ghosh january 2015 abstract high public debt often produces the drama of default and restructuring. Sbrancia, the liquidation of government debt, nber working paper 16893, march 2011. The case of venezuela, emerging markets finance and trade, 2016, 52, 2, 255crossref 12 raphael h. Pdf the return of financial repression researchgate. E4,e5,e58,e6,f31,f36,n26 abstract recent work has supported that there is a connection between the level of domestic debt level and sovereign default on external debt. Jul 12, 2014 financial repression is a policy that channels cheap funding to governments, typically supported by accommodative monetary policy. Debt restructuring and default more commonly hit external debt because the softer options of inflation and financial repression are not available. Financial repression is most successful in liquidating debt when accompanied by inflation. Financial repression redux, mpra paper 31641, university library of munich, germany. Reinhart on financial repression to deal with a debt overhang, bloomberg view, march 11, 2012 one of the main goals of financial repression is to keep nominal interest rates lower than would otherwise prevail. Jun 02, 2011 ive been getting questions about carmen reinharts new paper on financial repression pdf in the aftermath of large debt buildups, which asserts that said repression was a large part of the way the us and uk, in particular, dealt with their war debts. 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 growthhigh debt trap.
Dec 11, 2017 few people are aware of how widespread financial repression is. Opeds financial repression has come back to stay by carmen m. Reinhart, jacob kirkeegard, and belen sbrancia, financial repression redux 2011. The forgotten history of domestic debt reinhart 2011. Periods of high indebtedness have historically been associated with a rising incidence of default or restructuring of public and private debts. Thus, financial repression is most successful in liquidating debts when accompanied by inflation and can be considered a form of taxation, or alternatively a form of debasement. In section iv, we provide a basic conceptual framework for calculating the financial repression tax, or more specifically, the annual liquidation rate of government debt. I argue that the history of advanced economies under bretton woods and the liberalisation. An alternative interpretation, emphasized by reinhart and sbrancia 2011, allen 2014, and reinhart, reinhart, and rogo. Financial repression is a term that describes measures by which governments channel funds to themselves as a form of debt reduction. The term financial repression was introduced in the literature by the works of edward shaw 1973 and ronald mckinnon 1973. Historical antecedents on financial repression reinhart and sbrancia, 2011, 2015 for the advanced economies, real interest rates were negative roughly. International finance and macroeconomics newly developed long historical time series on public debt, along with modern data on external debts, allow a deeper analysis of the cycles underlying serial debt and banking crises.
Nov 20, 20 after the second world war, financial repression was the weapon of choice for heavily indebted countries. Because excessive financial repression leads to inefficient 6 giovannini, a. Subsequently, the usage of the term became a way of describing emerging market financial systems prior to the widespread financial liberalization that began in the 1980 see. Figure 3 for example, shows that under reinhart and sbrancias modelling, the public debtgdp ratio in the us would have risen from 116% in 1945 to 141% in 1955 in the absence of repression savings. This concept was introduced in 1973 by stanford economists. Financial repressionpolicies that allow a government to place its debt with financial institutions at relatively low interest rateshas been used widely for centuries. After the global financial crisis various forms of financial repression have prevailed in most developed and many emerging countries. International finance and macroeconomics, monetary economics recent work has supported that there is a connection between the level of domestic debt level and sovereign default on external debt. Jun 06, 2011 however, since the financial crisis hit hard in 2008, there has been a resurgence of interest in how governments have paid down massive debt burdens in the past, and a fascinating study of financial repression, the liquidation of government debt, authored by carmen reinhart and m.
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