Financial Repression Research Articles

Understanding the current global regime shift and the standing of the macro-financial system resilience

Understanding the current global regime shift and the standing of the macro-financial system resilience

How to escape from the debt trap: Lessons from the past

AbstractRising public debt everywhere has raised the question of how to reduce debt again in the future. High public debt also seems to be an impediment for the exit of central banks from ultra‐low interest rates and quantitative easing. Historical precedents and proposals have included austerity, haircuts and the generation of inflation. Each way has advantages and disadvantages, including uncertainty about effects and side effects. We approach the issue from an historical perspective, based on case studies of prominent approaches to debt reduction. We analyse debt reduction through economic austerity in Italy, hyperinflation in Germany after World War I, inflation in Argentina since the 1980s, currency reform in Germany after WW II, and financial repression in the United States and the United Kingdom after WW II. Finally, we discuss Ronald McKinnon's order of economic and financial liberalisation as well as the Chicago Plan combined with the introduction of central bank digital currencies as an option for the future.

Monetary Policy Transmission Under Financial Repression

Monetary Policy Transmission Under Financial Repression

ГЛОБАЛЬНА НЕСТАБІЛЬНІСТЬ КРІЗЬ ПРИЗМУ ФІНАНСОВОГО, ФІСКАЛЬНОГО І МОНЕТАРНОГО ДОМІНУВАННЯ: ДИЛЕМИ РЕГУЛЯТОРНОЇ ПОЛІТИКИ В МІЖНАРОДНИХ МАСШТАБАХ

The article argues that the uniqueness of the manifestations of global instability in 2023 lies in the combination of challenges facing regulators in the monetary, fiscal and financial spheres, caused by a set of measures to stimulate economic activity countercyclically in response to the pandemic, which had a significant and unconditionally systemic effect, which affected on the growth of inflationary pressure on the world economy and the formation of signs of a recession in the leading centers of economic power. Despite the fact that as the crisis worsens, more and more attention will be paid to the activities of SIFI, it will not be possible to shift responsibility for the stability of the global financial system solely to financial regulators, because the easing of monetary and fiscal policies in recent years has created the basis for exacerbating the problem of dominance in three dimensions at once - monetary, fiscal, financial. In the context of the study of the phenomenon of financial dominance, the policy of financial repression aimed at facilitating the servicing of public debt, which allows the government to receive additional funds, but slows down economic growth, is considered. Financial repression is a manifestation of regulatory competition that can affect how the market handles economic shocks. The analysis of global instability through the prism of the phenomena of financial, fiscal and monetary dominance made it possible to characterize the problems of regulatory policy on an international scale. The analysis carried out will contribute to the formation of a consensus position on the way that can help to structure the various institutional and managerial mechanisms associated with macroprudential policy. The study will contribute to the solidarity of views on the independence, accountability and transparency of macroprudential regulators, as well as issues that should be dealt with by fiscal and monetary authorities in an attempt to reach a compromise in determining the objectives of economic policy on the part of the Central Bank and the government, depending on the level of its debt and fiscal load, and also depending on the structure of its national financial market. Keywords: macroprudential policy, fiscal policy, monetary policy, financial market, financial dominance, fiscal dominance, monetary dominance, Central Banks

European financial law and the state-finance nexus: Sovereign privileges or market discipline for safe public debt?

AbstractEuropean financial regulation consistently gives governments privileged access to private investors, reflecting the anchor role assigned to sovereign securities as safe and liquid assets for the financial system. Legislative reforms after the financial crisis of 2008 further expanded the preferential treatment of sovereign securities as zero-risk claims, introduced portfolio requirements in favour of public debt, and constrained market speculation against governments. These sovereign privileges appear counterproductive for fiscal discipline and financial stability: they encourage excessive public debt issuance and make financial institutions holding government bonds - in particular from euro area countries with a variable risk profile - vulnerable to fiscal turbulence. Governments seem to have a conflict of interest. On the one hand, they are prudential regulators of financial risk-taking, on the other hand, they tend to overlook the financial sector's exposure to sovereign risk. This article considers four theories of the state-finance nexus and their solutions to this conflict of interest. The money view, the franchise view, and the modern financial repression view draw on the state's monetary and regulatory powers over finance to confirm sovereign safety. Their positions fundamentally contrast with the neoliberal view, which relies on free markets to enforce sustainable public finances. The article concludes that sovereign privileges present a fundamental dilemma for European financial governance with a neoliberal orientation: they oblige private investors to hold public debt, while weakening the role of markets in promoting fiscal discipline as the very foundation of sovereign safety.

The Determinants of Private Fixed Investment and the Relationship between Public and Private Capital Accumulation in Turkey

The purpose of this study is to analyse the determinants of private fixed investment spending in Turkey over the period 1970-96, which covers years of both financial repression and financial liberalisation. A reformulated neoclassical investment model and a reformulated flexible accelerator investment model have been tested for the Turkish economy. The results obtained support the accelerator principle and the crowding out hypothesis, that is, public and private sector investments have been found to be substitutes. Furthermore, the hypothesis that the volume of funds is as important as the cost of funds used in financing private fixed investment has been verified. On the other hand, the so-called McKinnon-Shaw hypothesis has not been completely verified because the effect of the medium-term real lending rate on private fixed investment has been found to be negative but statistically insignificant. Finally, the financial and liberalisation programmes that have been implemented since 1983 have not yet shown any noticeable positive effects on private investment.

Relationship Between Public Debt And Financial Development In Kenya

Purpose: This study sought to analyze the relationship between public debt and financial development in Kenya. The specific objectives were to examine the association between public domestic debt and financial development, to analyze the connexion between public external debt and Kenya's financial development. The study was underpinned on Financial Repression, Financial Liberalization, Lazy Bank Hypothesis, Demand following hypothesis, and the MacKinnon theoretical model.
 Methodology: The study applied positivism philosophy and explanatory research design. The study used country data hence no need for sampling. Data was collected for 1964 to 2019 from Kenya's Central Bank. Descriptive and inferential statistics were used in the study. Diagnostic tests such as Multi-collinearity, Auto-correlation, Normality, and Unit root were performed. Specifically, the long-run and short-run relationships were analyzed using the Auto-Regressive Distributive lag (ARDL) bound test for cointegration. An error correction model was applied to examine the short-run association.
 Finding: The test suggested the presence of a stable long-run relationship between financial development, public domestic debt, public external debt, and interest rate. The study finding indicates that public domestic debt has a statistically significant negative relationship with Kenya's financial development both in the long and short run. Also, public external debt has a statistically significant positive long and short-run association with financial development.
 Unique Contribution to Theory, Practice and Policy: The affirms liberalization theory by Shaw and Mackinnon (1973), advocating for a reduction in direct government participation in the financial market credit restriction In addition the study's findings are consistent with the lazy bank hypothesis by Hauner (2009) In addition, the government must ensure appropriate market-determined interest rate must be applied in domestic public debt. Furthermore, the government should continue fostering financial liberalization policies that encourage public external debt has its impacts positively on financial development.
 

Analysis of the Impact of Investor Sentiment on IPO Underpricing: Perspective from GEM Manufacturing Firms

The IPO phenomenon is a hot issue based on the financial field of listed companies. China has the phenomenon of IPO underpricing, and the underpricing of new shares in China is much higher than that in other countries. Unlike western countries, China's financial repression phenomenon is stronger, the financial environment is special, and there are more retail investors in China's stock market, which are more obviously influenced by emotions and have a strong herd mentality. IPO underpricing has more negative impact on China's capital market. This paper analyzes the reasons for investors' emotional frenzy on the first day closing price of GEM new shares listed from the perspective of behavioral finance. From the perspective of investor sentiment, this paper selects the proxy variables of investor sentiment in different levels of markets and uses multiple regression method to study the impact of investor sentiment on IPO underpricing. It is found that the winning rate is adversely connected with IPO underpricing, while turnover rate is positively correlated with it, and corresponding policy suggestions are put forward. The results in this paper benefit certain investors in the financial market.

Financial development: The concept and prospects

A significant and ever-growing body of papers revealing various aspects of financial development lead to polysemy regarding this concept. Fundamentally financial development is defined in this study as such alterations which help to reduce explicit and implicit costs related to the work of the financial system and providing its functions. Practically it is characterized by various configurations and scenarios depending on the place and time. Historically, we can see the transition from financial repression to financial liberalization, but the assessment of the consequences of financial liberalization remains ambiguous. Moreover, there are concerns that financialization, as a phenomenon of outpacing growth in the financial sector liabilities compared to the economy as a whole, will restrain incentives for financial development. However, financial innovation as another objectification of financial development can overcome the confines imposed by financialization. Financial innovations contribute more to increasing the financial inclusion and financial systems efficiency and to a lesser extent to financial deepening. In contemporary world financial development trends, driven by digitalization, lay the basis of the financial sector’s fundamental modernization. They will make it possible to overcome the imbalances that were previously associated with the concept of financialization, the weakening of the link between financial development and economic growth, and other structural issues.

Bank liquidity hoarding and corporate maturity mismatch: Evidence from China

Using a comprehensive data of 634 A-share listed firms and 128 commercial banks from 2012 to 2020 in China, and a newly constructed loan-weighted liquidity hoarding (LWLH) variable to measure a firm’s exposure to bank liquidity hoarding shocks, this paper investigates the impact of bank liquidity hoarding on corporate maturity mismatch. We find LWLH would aggravate the corporate maturity mismatch of investment and financing, mainly through shortening firms’ loan maturities or reducing the proportions of long-term credits. The aggregation effects are more prevalent for firms with lower internal financing capacity and higher industry competition. These results imply that the maturity mismatch of listed companies in China is more likely to be an alternative to deal with financial repression, rather than an active behavior for reducing financing costs.

Formalize the informal: market segmentation and integration in the formal and informal credit markets in Wenzhou

In 2012, the Chinese government designated Wenzhou city as a testbed for policy experimentation aimed at institutionalizing informal lending practices. This study investigates how interest rates in the formal and informal credit markets interacted before and after this policy experimentation. Hence, we use the vector autoregression models and ordinary multiple regression method, which is based on the financial repression theory. We document large yield spreads between the formal and informal credit markets in Wenzhou before (2003–2011) and after (2013–2018) the reforms. We find an increase in the responsiveness of the informal sector to the formal sector, after the reforms. We argue that the informal financial system serves as a one-way substitute for the formal financial sector in Wenzhou. An analysis of the transaction-level data suggests that maturity, availability of collateralization, loan purpose, and the amount of loans determine informal lending rates. Thus, this study provides important policy implications for reforming China’s financial system.

Financial repression, SOE reform and fiscal-monetary policy coordination

We build a dynamic stochastic general equilibrium (DSGE) model with financial repression and conduct estimation and simulation with it using aggregate data. We discuss the interaction and optimal combination of fiscal and monetary policies when the model features SOE monopoly and financial repression. We find that under current situation, fiscal policy should play a bigger role in stabilizing output, while monetary policy ought to pay more attention to combatting inflation. Although private firms' limited access to credit can be attributed to financial repression and SOE monopoly, financial repression is a second-best policy, in that it promotes SOE's output via cheap credit when SOEs behave like monopolists. This offsets the efficiency loss associated with monopoly. Moreover, our policy experiments show that the optimal fiscal policy can respond less to output fluctuations, when SOE reforms dampen the significance of financial repression.

The Aftermath of Debt Surges

Debt in emerging markets and developing economies is at its highest level in half a century. In about 9 in 10 emerging markets and developing economies, debt is higher now than it was in 2010, and in half of the emerging markets and developing economies, debt is more than 30 percentage points of GDP higher than in 2010. This article reviews a menu of options that in the past have helped lower debt burdens. It examines orthodox options (enhancing growth, fiscal consolidation, privatization, and wealth taxation) and heterodox options (inflation, financial repression, and debt default and restructuring). The mix of feasible options depends on country characteristics and the type of debt. However, none of these options comes without political, economic, and social costs. The challenges associated with debt reduction raise questions of global governance, including to what extent advanced economies can better support emerging market and developing economies in cushioning prospective shocks.

Sanctions and the Exchange Rate

Stabilising the exchange rate allows the Russian government to anchor inflation expectations and support consumption but comes at the cost of the financial repression of domestic savers.

Drivers of intermediation costs, financial repression and stability

Drivers of intermediation costs, financial repression and stability

The Curse of Central Bank Digital Cash

This paper surveys the consequences of Central Bank Digital Currencies (CBDC) on personal liberty and privacy. The Central Banks’ response to the advent of Bitcoin and other cryptocurrencies has profound implications for financial intermediation, monetary and fiscal policies, financial repression, and surveillance. More than allowing for meddling with money, a CBDC may enable meddling with human free will, posing grave threats to the preservation of freedom.

Hyperinflation and banks

In this paper we consider a triangular inter-dependence between hyperinflation, financial repression, and the financial crisis in FRY in the 1990s. When all three vertices of the triangle are present, the crisis propagates and is amplified along its edges. We focus, especially, on the less studied link between the financial crisis and financial repression in FRY. Setting administrative limits on interest rates under conditions of hyperinflation leads to deeply negative real interest rates. The situation in FRY was further aggravated by credit allocation to privileged participants. Under such circumstances, all dinar components of bank balance sheets quickly became worthless, credit activities of banks died down and real quantities of dinars in circulation became negligible. The situation improved only after the removal of the outside repression (i.e. removal of sanctions), reorganization of the entire financial sector and the entrance of foreign banks into the Serbian market at the beginning of 2000s.

The effect of financial repression policy on bank liquidity risk (evidence from Central Bank of Iran)

The effect of financial repression policy on bank liquidity risk (evidence from Central Bank of Iran)

The effect of financial repression policy on bank liquidity risk (evidence from Central Bank of Iran)

The effect of financial repression policy on bank liquidity risk (evidence from Central Bank of Iran)

Exogenous Shocks and Inflation Under Conditions of Financial Repression

Exogenous Shocks and Inflation Under Conditions of Financial Repression