The Return of Financial Repression

31 Pages Posted: 25 May 2012

See all articles by Carmen Reinhart

Carmen Reinhart

National Bureau of Economic Research (NBER); Peter G. Peterson Institute for International Economics; Harvard University - Center for Business and Government; Harvard University, Harvard Kennedy School (HKS), Belfer Center for Science and International Affairs (BCSIA) ; University of Maryland - School of Public Affairs; World Bank; Centre for Economic Policy Research (CEPR); International Monetary Fund (IMF); Harvard University - Harvard Kennedy School (HKS)

Date Written: April 2012

Abstract

Periods of high indebtedness have historically been associated with a rising incidence of default or restructuring of public and private debts. Sometimes the debt restructuring is more subtle and takes the form of 'financial repression'. Consistent negative real interest rates are equivalent to a tax on bond holders and, more generally, savers. In the heavily regulated financial markets of the Bretton Woods system, a variety of financial domestic and international restrictions facilitated a sharp and rapid reduction or 'liquidation' of public debt from the late 1940s to the 1970s. The restrictions or regulatory measures of that era had their origins in what would now come under the heading of 'macroprudential' concerns in the wake of the severe banking crises that swept many countries in the early 1930s. The surge in public debts that followed during the Great Depression and through World War II only made the case for stable and low interest rates and directed credit more compelling to policymakers. The resurgence of financial repression in the wake of the 2007-2009 financial crises alongside the surge in public debts in advanced economies is documented here. This process of financial 'de-globalization' may have only just begun.

Keywords: capital controls, debt, financial repression, inflation, interest rates, regulation

JEL Classification: E2, E3, E6, F3, F4, H6, N10

Suggested Citation

Reinhart, Carmen and Reinhart, Carmen and Reinhart, Carmen and Reinhart, Carmen and Reinhart, Carmen and Reinhart, Carmen and Reinhart, Carmen and Reinhart, Carmen, The Return of Financial Repression (April 2012). CEPR Discussion Paper No. DP8947, Available at SSRN: https://ssrn.com/abstract=2066320

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