From Fiscal Deadlock to Financial Repression: Anatomy of a Fall

Abstract Speculation has long been thought to have significant economic effects, but it is difficult to measure, making it challenging to examine these effects empirically. In this paper we measure speculation in the United Kingdom since 1785 by using business and financial reporting in The Times newspaper. Our monthly speculation index reveals four distinct epochs of speculation in the United Kingdom. Epochs of high speculation coincide with higher stock market returns and higher economic growth, while low‐speculation periods coincide with high levels of government debt and financial repression. We find that low interest rates foment the development of higher speculation, and that eras of higher speculation are often followed by greater banking instability.

We analyze real returns on U.S. and U.K. government debt during major wars and the COVID-19 pandemic over the past three centuries. Wars are associated with sharply negative real returns on outstanding government debt, with returns falling far below economic growth, in contrast to peacetime periods when returns exceed growth. Elevated surprise inflation and financial repression account for a cumulative 31% wedge between returns and growth over four years of war, implying that bondholders bear a substantial share of wartime fiscal costs. During wartime, government bonds also systematically underperform risky assets.<br><br>Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at <a href="http://www.nber.org/papers/w34820" TARGET="_blank">www.nber.org</a>.<br>

Abstract During the global economic crisis of 1929–33, deposits in the Dutch commercial banking sector sharply declined as funds shifted to the government‐guaranteed Post Office Savings Bank and other savings institutions. Unlike earlier studies for neighbouring countries, we demonstrate that this shift was driven less by a flight to safety and more by a reduction in long‐term interest rates on savings accounts offered by commercial banks, whilst the rates offered by the Post Office Savings Bank remained stable. Through a series of policy measures resembling financial repression, the Dutch government actively encouraged this shift to ensure a steady demand for government debt amongst savings institutions. As the demand for loans decreased, commercial banks managed to retain their profitability by reducing lending to smaller, less profitable businesses, as evidenced by higher minimum loan sizes, a preference for existing clients over new ones, and increased requirements for tangible collateral. This strategic move to eliminate less profitable loans from their portfolios enabled banks to weather the period with minimal damage and prevent an outright banking crisis, but it did contribute to a substantial reduction in private credit.

The importance of financial repression to the Malaysian financial development appears to be recognised. Lengthy theoretical and empirical discussions in previous literature have taken place on determinant of financial development which are focusing on macroeconomic factors. However, they ignore the role of financial repression as a determinant for financial development. Thus, the main purpose of this study is to examine the effect of financial repressions and their causality effects on financial development in Malaysia. There are five proxies used to measure financial repression which are public debt, statutory reserve requirement, liquidity requirement, interest rate control, and directed credit program. Other variable such as gross domestic product (GDP), inflation, human capital, and gross fixed capital formation also included as control variable. This study employed 42 years’ time series data for the period of 1980-2022. Augmented Dickey Fuller (ADF) unit root test and Phillip Perron unit root tests are applied to test the stationarity properties of the series. This study uses Principal Component Analysis (PCA) to measure financial repression index (FRI). Its address the problem of multicollinearity or high correlation between the various financial repression indicators. This study also employed the Autoregressive Distributed Lag (ARDL) Model to examine the long-run robustness and short-run dynamics of independent variables on Malaysia’s financial development. The causal relationship between the variables is further investigated using the Toda Yamamoto Granger non-causality test. Overall, the result shows, there is a negatively significant relationship between financial repression index and financial development. All variables LNFD, LNGDP, LNINF, LNHC and LNGFCF causes LNFRI. However, there is no bi-directional causality (feedback hypothesis) detected in this model. The government could avoid a major policy reversal to reinforce the gains of the reform program. Instead, the government should focus on fine-tuning current policy positions and implementing a stable macro-financial climate based on standard macroeconomic policies with a stable interest rate and lower inflation.

Abstract: Authoritarian governments worldwide are increasingly using financial repression to disable their challengers. By surveilling and freezing bank accounts, they can stop democratic opposition in its tracks. At the same time, human rights groups from Nigeria to Russia to Hong Kong are turning to Bitcoin—a censorship-resistant digital currency that can be used without tying one's transactions to one's personal information—to receive donations, run payroll, and keep their operations going, even if dictators want them to stop.

We investigate how financial repression affects financial development of Bangladesh over the period 1980-2022. Employing VECM, we find that repression policies negatively affect financial development, meaning that controlling the financial sector counteracts financial progress. Following the results, we recommend some policies. To accelerate financial progress, policymakers need to rethink on these restrictive policy instruments. For emerging nations like Bangladesh, this paper offers the first empirical data on the connection between financial repression and financial development.

This paper examines the structural and political-economic constraints that limit China’s long-term prospects for convergence with advanced economies. Using the metaphor of an “elephant in a cage,” the study highlights how market reforms unleashed growth but remain restricted by state control. The analysis traces China’s economic trajectory from the Maoist command economy to decades of market-oriented reforms, while emphasizing persistent challenges such as excess savings, financial repression, capital market distortions, real estate instability, capital flight, and demographic decline. It argues that these constraints, combined with authoritarian governance, significantly hinder China’s ability to achieve per capita income levels comparable to G7 nations. The paper concludes that while overall GDP parity with the United States may be attainable, genuine convergence in living standards will remain elusive without deeper institutional reforms and the establishment of rule of law.

This examine explores the impact of monetary liberalization on the steadiness of Indian banks the usage of a conceptbased totally analytical framework. Since the early 1990s, India has passed through massive financial reforms aimed at liberalizing the banking quarter, which includes deregulation of interest rates, relaxation of credit score controls, discount of statutory liquidity and cash reserve ratios, and the entry of private and foreign banks. These measures were added with the targets of enhancing performance, increasing competition, attracting foreign capital, and enhancing overall financial inclusion. By applying key theoretical models along with the Financial Repression Hypothesis, Market Discipline Theory, and Minsky’s Financial Instability Hypothesis, this studies critically examines the twin outcomes of liberalization—upgrades in productiveness and innovation on one hand, and extended exposure to economic vulnerabilities and systemic dangers on the opposite. The observe makes use of secondary statistics from the Reserve Bank of India, economic statements of major banks, and empirical traits in non-acting belongings, capital adequacy ratios, profitability, and liquidity tiers to assess how liberalization has motivated banking sector performance and balance. Findings advocate that financial liberalization has added approximately high-quality changes in phrases of operational performance, technological adoption, and global integration. However, it has additionally amplified the need for more potent danger management practices, powerful regulatory frameworks, and macro prudential oversight to save you financial instability. The study concludes by using presenting policy ASET Journal of Management Science (E- ISSN: 2584-220X) Copyright© 2025: Author(s) published by ASET College https://doi.org/10.47059/AJMS/V4I4/06 57 guidelines that emphasize the importance of balancing liberalization with financial prudence, ensuring that the lengthy-time period fitness and resilience of Indian banks aren't compromised.

The extent to which sovereign investor bases include domestic or foreign residents varies across Emerging Markets (EMs). Bondholder residency has significant implications, but why EM investor bases vary in the first place has not been widely explored. A comparative case study of Colombia and Mexico finds that one global financial factor (bond index composition) and one domestic institutional factor (pension fund investment regulations) affect bondholder residency more directly than several other push-pull factors and domestic institutions. Globally, changes in the composition of benchmark bond indexes can drive large and rapid investor base shifts. Domestically, different pension fund investment regulations lead to divergent investor base trends over time. The study advances the sovereign debt literature, highlights the importance of index investment vis-à-vis other push factors, identifies indexes as a source of financial subordination, and clarifies an implication of financial repression for sovereign debt.

ABSTRACT This study extends the financial repression model to theoretically explain China’s vertical fiscal imbalance, demonstrating how fiscal decentralization hampers rural financial development and thus lowers farmers’ income and welfare. Using data from 1,454 rural Chinese counties, we apply ordinary least squares, two-stage least squares, and nonlinear regression models to examine the impact of fiscal decentralization on farmers’ prosperity. The results reveal that there is a U-shaped relationship between the level of fiscal decentralization and common prosperity for farmers. China is currently on the left side of the U-shaped turning point, manifested as an inhibitory effect of fiscal decentralization on common prosperity for farmers.

Abstract We develop a model that features costly market segmentation and financial repression to link domestic and external sovereign debt with default. In a financially repressed economy, a government that exploits its market power in the domestic economy can also increase its external debt capacity, owing to a novel, additional endogenous cost of default. A government forfeits the gains from trading in segmented debt markets when it defaults. Among other empirical regularities, our model can account for the heterogeneity in sovereign debt levels of nonadvanced economies, based on their level of financial development.

PurposeThis study aims to determine the impact of interest rate regulation on bank lending behaviour. The application of interest rate caps as a financial repression and regulatory measure has sparked debate for decades. This study contributes to the ongoing debate on the consequences of rate caps on banks’ lending behaviour in Kenya.Design/methodology/approachThis study uses both fixed effects and two-step generalised method of moments techniques to establish the effects of interest rate caps on credit allocation across three sectors of the economy: government, private and interbank lending. To achieve this, the authors used data drawn from 35 licenced commercial banks in Kenya from 2004 to 2021.FindingsThe results, which are robust to endogeneity and other diagnostic checks, reveal shifts in lending behaviour by banks towards the government, and less to the private sector and interbank lending in rate cap periods. This study finds that rate caps have a significant and positive impact on bank lending to the government. This significant positive impact appears subdued for private and interbank lending.Research limitations/implicationsFrom a policy perspective, the findings highlight that interest rate caps do not benefit the private sector. An important implication of this study is that such policies may have unintended consequences of hindering growth in a broader economy. This study has the potential to inform policymakers and the banking industry in East Africa about the effects of interest rate regulation. High lending interest rates have seen some countries, such as Kenya, imposing interest rate caps and subsequently repealing them. Other countries, such as Uganda, were in the process of considering rate caps but have deferred the decision.Originality/valueThis study contributes to the ongoing debate regarding the implications of interest rate controls in developing economies. The study uses robust estimation approaches to argue its case for a separate examination of rate controls in a single-country setting owing to the unique institutional and contextual realities inherent in every jurisdiction.

The Habituation of Sanctions: Impact on Trade, Foreign Direct Investment, and Financial Repression

From Fiscal Deadlock to Financial Repression: Anatomy of a Fall

Amidst the rising sovereign debt levels and inflation crisis following COVID-19, governments around the world contemplated reintroducing financial repression which has significant economic implications. Although these implications have been empirically examined, there is still limited literature on the effect of the policy on wellbeing and financial stability. This study examines the impact of financial repression on human wellbeing and financial stability with data spanning 2000- 2019 in ten African countries using dynamic panel framework estimated with GMM strategy. The study finds that financial repression weakly but significantly and directly impact wellbeing and financial stability, and the macroeconomic environment negligibly influences repression effect on wellbeing but significantly influences repression effect on financial stability. Except interest rate controls, repressive high bank reserve ratio is good, but should be at moderate level to improve financial stability and human wellbeing, and some level of inflation is necessary to optimize repression benefits. Using more of the financial repression (FR) policy toolkits as proxy for FR could have captured repression better, instead of employing interest rate control and bank reserve ratio only. This nonetheless, will not adversely affect the findings since most of the FR toolkits are interconnected, and a trigger of one can trigger the others.

The shift from financial repression to financial liberalization causes cross-border capital flows and brought dramatic changes to the financial sector. In this regard, the financial sectors, acts as financial intermediary which plays a significant role in mobilizing funds between surplus and deficit units. Furthermore, financial liberalization creates higher competition and could have negative impact towards financial stability due to excessive risk taking. This study’s research model focuses on examining the impact of competition on the relationship between financial liberalization and financial stability. This model was analyzed by using the PLS-SEM and it was found that the measurement model explains 19% of the substantial amount of variance in financial stability. Based on this finding, this study will theoretically contribute in extending the competition stability view and competition fragility view as determiners of financial stability. Based on the empirical results, it can be concluded that in the presence of competition, financial liberalization has a significant effect on financial stability.

ABSTRACT This study is the first to test whether moral suasion is the main driver of the increasing home bias in Euro government bond mutual funds after the Euro debt crisis, with a focus on the most financially stressed economies during this period: Greece, Italy, Portugal, and Spain (GIPS). The findings reject the potential spillover effect of this type of financial repression of the previously documented European Union banking sector in GIPS government bond funds. The results reveal that informal pressure by performance-chasing unitholders might act as an effective self-control mechanism in moral suasion channels in the mutual fund industries of fiscally stressed countries.

This article diagnoses and discusses the structure, function and performance of the financial services sector in Zimbabwe since 1980. It adopted a document review approach. An extensive literature scanning from reports, plans, statutes and statutory instruments was done. It made use of thematic analysis to understand and assess the financial service sector in Zimbabwe during the post-colonial era to date. The financial sector in Zimbabwe has gone through various economic policy regimes since independence in April 1980. After it attained independence during this first decade, Zimbabwe‘s financial sector was still relatively small and dominated by foreign institutions. The country has experienced financial repression and high financing costs have discouraged domestic investment. High real interest rates continue to limit private credit growth, despite low financial intermediation due to lack of effective competition and a high level of non-performing loans. While the effects of mild, periodic financial repression on growth are ambiguous, there is adequate evidence that large negative interest rates cannot be sustained and are eventually leading to reduced growth. Therefore, there is need for an efficient financial system that enhances a country‘s growth prospects by channelling resources to their most productive uses, thereby fostering a more efficient allocation of resources. It also helps boost aggregate saving and investment rates, thus speeding up the accumulation of physical capital. Finally, growth is enhanced by strengthening competition and stimulating innovative activities, promoting dynamic efficiency.

The growth rate of China's broad money supply (M2) significantly exceeds the combined rates of economic growth and inflation, leading to a continuous rise in the ratio of M2 to GDP. This phenomenon is referred to as the "China Money Mystery." The explanation for this phenomenon involves several factors. Firstly, interest rate and exchange rate controls in the financial market lead to excessive increases in money demand. Secondly, financial repression results in excessive use of indirect financing and a lack of investment channels, further distorting money supply. Thirdly, the financial hoarding theory suggests that a large amount of money flows in the virtual economy rather than being invested in the real economy, thus failing to induce noticeable inflation. Finally, the applicability of traditional quantity theory of money in the modern credit money system is gradually diminishing, failing to explain the relationship between money supply and prices. By integrating these factors, a better understanding of the abnormal monetary supply phenomenon in China and its implications can be achieved.