What is financial repression?

Financial repression is monetary policy that a government or central bank carries out to finance the public sector through intervention in the financial markets, at the expense of savers and investors. The term was introduced in the 1970s to describe policies in certain developing countries (such as legislation against usury, but also smooth taxation through inflation) and at the beginning of the 21st century applied to the regulation of financial markets in developed countries in the Keynesian era (ca. 1945-1970) and the years after the credit crisis of 2007.

The term can have a polemic charge, especially among advocates of liberalization and austerity policy, which propose regulation as ‘market-disruptive’.

Reinhart and Sbrancia understand by financial repression various forms of financial regulation:

  • the maximization of interest rates, by regulation or by direct control of the interest paid by central banks to commercial banks;
  • setting requirements for reserves and capital buffers at the financial institutions (banks / insurers);
  • the obligation, imposed on pension funds, to keep bonds of the own government in the portfolio;
  • capital restrictions;
  • transaction taxes on shares;
  • State ownership or management of banks.

They predict a return to this type of policy to reduce the sovereign debt accrued after the credit crisis.

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