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Are Government Revenues From Financial Repression Worth the Costs?

James Alm () and Robert Buckley ()

Public Finance Review, 1998, vol. 26, issue 3, 187-213

Abstract: A new perspective on financial repression has recently been developed that stresses the public finance aspects of this policy. In this view, financial repression is seen as an implicit tax that generates "benefits" for government in the form of substantial amounts of government revenues, especially under high inflation. However, once it is granted that financial repression is a tax, it must also be granted that there are "costs" of repression, in the form of an array of distortions. In this article, the authors present estimates of the welfare costs of financial repression for Turkey, a country that recent work shows has been heavily taxed by such means. A simple computable general equilibrium model is constructed and calibrated to obtain estimates of the efficiency costs of this implicit tax. The analysis shows that financial repression creates very high welfare costs whose magnitude may well exceed the revenues generated. Consequently, although financial liberalization measures should always be cautiously pursued, and a better understanding of the scale of the implicit taxes implied by government policy is very useful, the size of the latter should not serve as a rationale to discourage pursuit of the former.

Date: 1998
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DOI: 10.1177/109114219802600301

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Handle: RePEc:sae:pubfin:v:26:y:1998:i:3:p:187-213