Reinhart is professor of the international financial system at harvard universitys john f. Reinhart and rogoffs latest paper warns on financial repression harvard duo argue that advanced countries will not be able to return to more sustainable levels of debt through austerity and. Dividends wealth taxes and financial repression loom as. The forgotten history of domestic debt reinhart 2011. Reinhart peterson institute for international economics nber and cepr asociaci. Financial repression and high public debt in europe. Financial repression redux governments are once again finding ways to manipulate markets to hold down the cost of financing debt carmen m. Munich personal repec archive financial repression redux reinhart, carmen and kirkegaard, jacob and sbrancia, belen peterson institute for international economics june 2011 online at mpra paper no. Carmen, you have said that financial repression will be a solution that governments and creditors will inevitably look to because of the debt crisis. Zombanakis professor of the international financial system at harvard kennedy school.
Fatas and mihov 20 and others note that this definition does not capture a return to potential output or to some predetermined trend. Rogoff authorized for distribution by stijn claessens december 20 abstract even after one of the most severe multiyear crises on record in the advanced. Financial repression redux munich personal repec archive. Kierkegaard et carmen m reinhart, financial repression, then and now, may 2012. Reinhart, jacob kirkeegard, and belen sbrancia, financial repression redux 2011. In the heavily regulated financial markets of the bretton woods system, a variety of restrictions facilitated a sharp and rapid reduction in public debtgdp. In the model the government can reduce the ex ante return on government debt by requiring banks to hold. The resurgence of financial repression in the wake of the 20072009 financial crises alongside the surge in public debts in advanced economies is documented here.
Financial repression is a term that describes measures by which governments channel funds to themselves as a form of debt reduction. Jun 02, 2011 ive been getting questions about carmen reinharts new paper on financial repression pdf in the aftermath of large debt buildups, which asserts that said repression was a large part of the way the us and uk, in particular, dealt with their war debts. Belen sbrancia authorized for distribution by atish r. Financial repression refers to a wide array of policies that allow a government to place its debt with financial institutions at relatively low interest rates. This financial repression tax is unlike income, consumption, or sales taxes. Consistent negative real interest rates are equivalent to a tax on. As in reinhart and rogoff 2009, our duration measure is the number of years it takes to reach the prior peak in real per capita income.
Monetary policy is a powerful lever to achieve this end. Financial repression includes directed lending to government by captive domestic audiences such as pension funds, explicit or implicit caps on interest rates. Jan 18, 2020 financial repression is a term that describes measures by which governments channel funds to themselves as a form of debt reduction. E31,e4,e6,f3,f4,h6,n10 abstract historically, periods of high indebtedness have been associated with a rising incidence of default or restructuring of public and private debts. For a more indepth description of financial repression, see the liquidation of government debt by carmen reinhart and m. This concept was introduced in 1973 by stanford economists. Reinhart peterson institute for international economics nber and. Financial crises, debt overhangs and their consequences carmen m. The consequences of financial repression seeking alpha. The results showed that financial repression exceeded 2% of gdp for seven countries, and greater than 3% for five countries.
This essay focuses on one important part of financial repression. It is probable that in 19, while financial panics were not uncommon, high inflation was still largely seen by the founders of the fed as a relatively rare phenomenon associated with shifting mandates. Reinhart, peterson institute for international economics oped on. Some lessons learned and those forgotten1 prepared by carmen m. A panoramic view of eight centuries of financial crises carmen m. Carmen reinhart, coauthor of this time is different, explains why heavy debt burdens in the advanced market economies will mean tighter state control of capital flows. Reinhart presents the findings of her latest book, a decade of debt, coauthored with kenneth s. Deep systemic financial crises tend to be infrequent events, as they leave deep lasting scars on the psyche of consumers, investors, politicians and r. Reinhart has written on a variety of topics in macroeconomics and international finance. A subtle type of debt restructuring takes the form of financial repression. The first of these approaches follows reinhart and sbrancia 2010, 2015 and decomposes the expost real returns on domestic debt into the unexpected inflation and exante financial repression components.
This process of financial deglobalisation may have only just begun. Reinhartreinhart peterson institute for international economics,economics, nber, nber, and cepr peterson institute for international economics september 9september 9, 2011, washington, dc reinhart 1. Governments do not call these actions financial repression, of course, but. Financial repression allows governments to borrow at artificially low interest rates. Quantifying financial repression is challenging, because it relies on an estimate of the interest rate which would prevail in the absence of repression. Opeds financial repression has come back to stay by carmen m. Reinhart nee castellanos, born october 7, 1955 is an american economist and the minos a. She was senior policy advisor and deputy director at the international monetary fund and held positions as chief economist and vice president at the investment bank bear stearns in the 1980s. The opaque transfer of wealth using negative interest and regulation inflation is hidden by making the same priced potato chip bag even smaller never underestimate the governments ability to create a captive audience about the guest. If this really was a return to the great depression of the 1930s, stock markets would have suffered a much bigger reaction.
A read is counted each time someone views a publication summary such as the title, abstract, and list of authors, clicks on a figure, or views or downloads the fulltext. Previously, she was the dennis weatherstone senior fellow at the. Financial repression in general equilbrium econstor. Third, domestic debt which is often larger than the monetary base in the runup to high inflation has largely been ignored in the inflation literature. Sometimes the debt restructuring is more subtle and takes the form of financial repression. Financial repression, in a nutshell, refers to a set of government policies that create an environment of low or negative real interest rates, with the unstated intention of generating cheap funding for government spending. Ive been getting questions about carmen reinhart s new paper on financial repression pdf in the aftermath of large debt buildups, which asserts that said repression was a large part of the way the us and uk, in particular, dealt with their war debts on a first read, i have some problems with the methodology, which is based on lopping off any years in which the real interest rate on. On the use of reserve requirements in dealing with the capitalflow problem, international journal of finance and economics, vol. Using a variety of methodologies, we estimate the magnitude of the tax from financial. Financial crises, debt overhangs and their consequences.
They implement financial repression by keeping interest. Financial repression is defined as the governments strategy supported by. Ghosh january 2015 abstract high public debt often produces the drama of default and restructuring. The treasury had set a structure of returns for securities of different maturities. Pdf the return of financial repression researchgate. Previously, she was the dennis weatherstone senior fellow at the peterson institute for international economics. Second, the data help to explain the puzzle of why countries default on external debts at seemingly low debt thresholds. The resurgence of financial repression in the wake of the 20072009 financial. But something a little more palatable that has been gaining attention recently is the use of. Reinhart, 2011, the return of financial repression in the aftermath of the great recession, forthcoming peterson institute working paper washington. Carmen reinhart on the return of financial repression.
Reinhart, carmen and kirkegaard, jacob and sbrancia. Dec 11, 2017 few people are aware of how widespread financial repression is. Financial repression refers to a set of governmental policies that keep real interest rates low or negative, with the unstated intention of generating cheap funding for government spending. Wealth taxes and financial repression loom as government. Modern history of exchange rate arrangements qje with rogoff it. The way out for governments is effectively to put the worlds savers and investors in pens, hold them down, and shear them over and over again, year after year. Financial repression, government debt, bayesian estimation. This thesis examines whether and to what extent modern financial repression has been applied in europe to address these challenges. In this paper, we put forward a quantitative business cycle model which features financial repression.
Her work has helped to inform the understanding of financial crises for over a decade. Zombanakis professor of the international financial system at harvard universitys kennedy school of government. The sharp rise in public debttogdp ratios in the aftermath of the global financial crisis of 2008 posed serious challenges for fiscal policy in euro area countries. Unlike foreign currencydenominated debt, debt in domestic currency may be reduced through financial repression, a tax on bondholders and savers producing negative real interest rates. For five countries india, mexico, pakistan, sri lanka, and zimbabwe it represented approximately 20% of tax revenue. In the old days they were called also exchange restrictions. The ramifications of these policies will be measured in decades, not years. Zombanakis professor of the international financial system at.
Periods of high indebtedness have historically been associated with a rising incidence of default or restructuring of public and. The mirage of exchange rate regimes for emerging market countries. The return of financial repression two measures that have been used in some developed markets dms in recent years to ease debt burdens have been spending cuts and tax increases austerity programs, and debt restructuring greece. The size of the financial repression tax was computed for 24 emerging markets from 1974 to 1987. E6,f3,n0 abstract this paper offers a panoramic analysis of the history of financial crises dating from englands fourteenthcentury. Of 2 the next section presents evidence on this as does.
The main rationale for implementing financial repression is to give the government access to fiscal resources without the need to go through the government budget, and in cheaper ways than receiving financing in the market. Consistent negative real interest rates are equivalent to a tax on bond holders and, more generally, savers. This process of financial deglobalization may have only just begun. Sometimes the debt restructuring is subtle and takes the form of, financial repression. The return of financial repression periods of high indebtedness have historically been associated with a rising incidence of default or restructuring of public and private debts. You talked about the free flow of capital, and so another pillar of financial repression is capital controls. Lse europe in question discussion paper series beyond. Reinhart and rogoffs latest paper warns on financial. Nov 20, 20 reinhart and rogoffs latest paper warns on financial repression harvard duo argue that advanced countries will not be able to return to more sustainable levels of debt through austerity and. May 25, 2012 the resurgence of financial repression in the wake of the 20072009 financial crises alongside the surge in public debts in advanced economies is documented here.
First, domestic debt accounts for almost twothirds of public debt. Periods of high indebtedness have historically been associated with a rising incidence of default or restructuring of public and private debts. Financial repression, inflation, interest rates, debt liquidation, default, restructuring, debt reduction. Reinhart and rogoffs latest paper warns on financial repression. Historically, periods of high indebtedness have been associated with a rising incidence of default or restructuring of public and private debts. The second approach measures the financial repression tax or. All content in this area was uploaded by carmen reinhart. But debt is also reduced through financial repression, a tax on bondholders and savers via negative or below. As austerity policies are unpopular with voters and high debt levels are a drag on growth, several economists, most famously carmen reinhart and kenneth rogoff, have suggested that governments might have to consider an extra dose of financial repression as a way out of the low growthhigh debt trap.
1566 195 480 1402 1149 422 207 378 376 37 995 1145 1377 1574 905 252 169 1607 1231 292 393 949 290 317 942 1033 827 917 747 455 617 1488 500