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Financial Repression Essay

717 words - 3 pages

Introduction and Overview

The subject of financial development and growth has always been an area that perceived great attention over the past two decades. One of which is financial repression, was what Cole (1974) referred to as a term used characterize a state in an economy where, interest rates are averted from determining the equilibrium rate of demand and supply of money. In other words, it is a set of government rules and regulations, and other restrictions other than that of the market that inhibits the financial intermediaries of an economy to maximize their output (Ito 2008 p. 430). The genesis of this theory was around the 1970s pioneered by two renowned economists Edward S. ...view middle of the document...

Financial Repression in somewhat way acts as a form of debt restructuring.
It is however not very surprising that this area has gained a lot of attention after the era of the global financial crisis.

These policies include but are not limited to targeted lending to the government from pension funds and other indigenous banks, regulated cross border capital shifting, caps on interest rates (implicitly or explicitly), and close knitted relationships between banks (other financial institutions) and the government, through either direct public ownership in the bank or through moral suasion (Reinhart, Kirkegaard and Sbrancia 2011).

Financial repression can also take the form of placement of enormous nonmarketable government debts, securities transaction taxes, excessively huge bank reserve (liquidity) requirements, or inhibition of gold purchases. Current policy discussions categorises financial repression issues under “macroprudential regulation”, which Hanson, Kashyap and Stein (2011) described as an approach that recognises the overall importance of general equilibrium effects aimed at alleviating the systematic risk of the entire financial system

As stated above, this theory has it origins from the works of Shaw (1973) and McKinnon (1973) who both argued that historically, countries (developed but more especially developing) have limited their economies with several government...

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