Financial repression and the currency market under sanctions

Oleg Itskhoki and Dmitry Mukhin

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Tariffs, trade wars, and financial sanctions have become a common feature of the global economy. In response, many governments consider departing from the Washington Consensus and adding unconventional tools such as foreign exchange interventions, capital controls, and financial repression. This paper asks when, and how, financial repression can be used in the currency market, and how it compares with foreign exchange (FX) interventions and conventional monetary and fiscal policy. We show that although the use of financial repression is welfare-reducing in response to international shocks, even when FX interventions are fully constrained, it can be effectively used for redistributive and fiscal reasons. Greater international financial isolation makes financial repression more potent in extracting fiscal surplus from the private sector.

Keywords: currency market; financial repression; financial sanctions; official reserves (search for similar items in EconPapers)
JEL-codes: F3 G3 L81 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2026-08-31
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Published in Economic Policy, 31, August, 2026, 41(125), pp. 76 - 101. ISSN: 0266-4658

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