Abstract
The past decade has witnessed an explosion of research on financial sector models of financially repressed developing economies. For the most part, financial repression is interpreted to be the technique of holding interest rates (particularly deposit rates of interest) below their free market equilibrium levels. The recent spate of activity in this field was produced by the simultaneous publication in 1973 of books by McKinnon and Shaw. Both authors demonstrate how economic theory can be applied to the analysis of the effects of financial conditions on investment and the real rate of economic growth. Since 1973, models of financially repressed developing economies have been formalized mathematically, extended to open economies in order to analyse exchange rate policies, and tested empirically. This paper presents a critical survey of the major contributions to the literature in this field since 1973.
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