Abstract
Financial repression (FR) allows the government to save on its interest rate payments. However, forcing financial intermediaries to increase the share of government debt in their portfolios can alter transmission of macroeconomic shocks. In this paper, we raise the question whether it is the case. Simulations of a DSGE model with financial frictions indicate that the presence of FR creates an additional link between changes in government fiscal position and dynamics of corporate credit terms. Holding regulatory environment constant, if government wishes to issue more debt, it has to offer higher return on its debt and reduce its FR revenues. Lower FR revenues translate into better borrowing terms for entrepreneurs and higher private investment. Hence, FR can either amplify or dampen output response to the shock, depending on whether this shock increases or decreases government financing needs
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