Financial Repression is Knocking at the Door, Again

Etibar Jafarov, Rodolfo Maino and Marco Pani

No 2019/211, IMF Working Papers from International Monetary Fund

Abstract: Financial repression (legal restrictions on interest rates, credit allocation, capital movements, and other financial operations) was widely used in the past but was largely abandoned in the liberalization wave of the 1990s, as widespread support for interventionist policies gave way to a renewed conception of government as an impartial referee. Financial repression has come back on the agenda with the surge in public debt in the wake of the Global Financial Crisis, and some countries have reintroduced administrative ceilings on interest rates. By distorting market incentives and signals, financial repression induces losses from inefficiency and rent-seeking that are not easily quantified. This study attempts to assess some of these losses by estimating the impact of financial repression on growth using an updated index of interest rate controls covering 90 countries over 45 years. The results suggest that financial repression poses a significant drag on growth, which could amount to 0.4-0.7 percentage points.

Keywords: WP; interest rate; crisis; debt; interest rate restriction; rate of return; bank profitability ratio; crisis coefficient; IRC index; crisis increase; liberalization event; per capita income; liberalization wave; debt crisis coefficient; alternative investment; probability of a crisis; Interest rate policy; Credit; Loans; Interest rate corridor; Asia and Pacific; Sub-Saharan Africa; Caribbean; Middle East; North Africa (search for similar items in EconPapers)
Pages: 66
Date: 2019-09-30
New Economics Papers: this item is included in nep-fdg
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Citations: View citations in EconPapers (8)

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