Financial Repression is Knocking at the Door, Again

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.

A study of the factors affecting mobile money penetration rates in the West African Economic and Monetary Union (WAEMU) compared with East Africa

“…as ceilings on interest rates, directed credits to certain industries, or constraints on the composition of bank portfolios, financial repression is typically accompanied by additional restrictions on financial activity (Jafarov et al 2020).…”

Interest Rate Repression Around the World

“…These theoretical arguments have been tested by numerous empirical studies. Many studies have confirmed a negative association between interest rate repression and several macroeconomic outcomes such as savings rates, investment and economic growth (Fry, 1978(Fry, , 1997Roubini and Sala-i-Martin, 1992;Jafarov et al, 2019). Interest rate repression has also been found to be harmful to financial development.…”

“…However, existing studies either take a narrow geographical perspective, focusing on EMDEs (Helms and Reille, 2004) or advanced economies (see Reifner et al, 2010, for the EU; and Dasgupta and Mason, 2019, for the US), or, when taking a global perspective, they focus on lending interest rate caps only (Maimbo and Gallegos, 2014;Ferrari et al, 2018). In a paper similar to ours, Jafarov et al (2019) attempt to compile a database on all types of IRCs and construct a basic index (i.e. based on binary variables) of IRCs across economies.…”

Interest Rate Repression: A New Database

“…These theoretical arguments have been tested by numerous empirical studies. Many studies have confirmed a negative association between interest rate repression and several macroeconomic outcomes such as savings rates, investment and economic growth (Fry, 1978(Fry, , 1997Roubini and Sala-i-Martin, 1992;Jafarov et al, 2019). Interest rate repression has also been found to be harmful to financial development.…”

“…However, existing studies either take a narrow geographical perspective, focusing on EMDEs (Helms and Reille, 2004) or advanced economies (see Reifner et al, 2010, for the EU;and Dasgupta and Mason, 2019, for the US), or, when taking a global perspective, they focus on lending interest rate caps only (Maimbo and Gallegos, 2014;Ferrari et al, 2018). In a paper similar to ours, Jafarov et al (2019) attempt to compile a database on all types of IRCs and construct a basic index (i.e. based on binary variables) of IRCs across economies.…”