Reinhart and Sbrancia characterize financial repression as consisting of the following key elements:
- Explicit or indirect capping of interest rates, such as on government debt and deposit rates (Regulation Q).
- Government ownership or control of domestic banks and financial institutions with barriers that limit other institutions seeking to enter the market.
- High reserve requirements
- Creation or maintenance of a captive domestic market for government debt, achieved by requiring banks to hold government debt via capital requirements, or by prohibiting or disincentivising alternatives.
- Government restrictions on the transfer of assets abroad through the imposition of capital controls.
These measures allow governments to issue debt at lower interest rates. A low nominal interest rate can reduce debt servicing costs, while negative real interest rates erodes the real value of government debt. Thus, financial repression is most successful in liquidating debts when accompanied by inflation and can be considered a form of taxation, or alternatively a form of debasement.
“Unlike income, consumption, or sales taxes, the “repression” tax rate (or rates) are determined by financial regulations and inflation performance that are opaque to the highly politicized realm of fiscal measures. Given that deficit reduction usually involves highly unpopular expenditure reductions and (or) tax increases…the relatively ‘stealthier’ financial repression tax may be a more politically palatable alternative to authorities faced with the need to reduce outstanding debts.”
Financial Repression Animated
Banking in the age of financial repression and public hostility