Financial repression

Financial repression comprises "policies that result in savers earning returns below the rate of inflation" to allow banks to "provide cheap loans to companies and governments, reducing the burden of repayments." It can be particularly effective at liquidating government debt denominated in domestic currency. It can also lead to large expansions in debt "to levels evoking comparisons with the excesses that generated Japan’s lost decade and the 1997 Asian financial crisis." The term was introduced in 1973 by Stanford economists Edward S. Shaw and Ronald I. McKinnon to "disparage growth-inhibiting policies in emerging markets." Financial repression may consist of any of the following, alone or in combination.: Explicit or indirect capping of interest rates, such as on government debt and deposit rates (e.g., Regulation Q). Government ownership or control of domestic banks and financial institutions with barriers that limit other institutions from entering the market. High reserve requirements. Creation or maintenance of a captive domestic market for government debt, achieved by requiring banks to hold government debt via capital requirements, or by prohibiting or disincentivising alternatives. Government restrictions on the transfer of assets abroad through the imposition of capital controls. These measures allow governments to issue debt at lower interest rates. A low nominal interest rate can reduce debt servicing costs, while negative real interest rates erodes the real value of government debt. 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. The size of the financial repression tax was computed for 24 emerging markets from 1974 to 1987. The results showed that financial repression exceeded 2% of GDP for seven countries, and greater than 3% for five countries. For five countries (India, Mexico, Pakistan, Sri Lanka, and Zimbabwe) it represented approximately 20% of tax revenue.