Financial Regulation and Government Revenue: The Effects of a Policy Change in Ethiopia

24 Pages Posted: 6 Jun 2018

Multiple version iconThere are 2 versions of this paper

Date Written: June 6, 2018

Abstract

Financial regulation can generate government revenue by imposing the quantity and price of government bonds. We study an unexpected banking regulation introduced in 2011 by the Ethiopian Central Bank, forcing commercial banks to purchase a negative-yield government bond. High-frequency bank data and public finances documentation allow tracking the subsequent government revenue gain. This policy is compared to three alternatives: raising funds competitively on international markets; distorting the state-owned bank lending; and raising deposits through state-owned bank branches. Our results suggest that the revenue gain is moderate (1.5-2.6% of tax revenue); banks amass more bonds; their profitability slows without turning negative (from 10% to 2%).

Keywords: Financial Regulation, Government Revenue, Bank Taxes, Banks, Ethiopia

JEL Classification: G38, H20, H25, G21, O55

Suggested Citation

Limodio, Nicola and Strobbe, Francesco, Financial Regulation and Government Revenue: The Effects of a Policy Change in Ethiopia (June 6, 2018). BAFFI CAREFIN Centre Research Paper No. 2018-80. Available at SSRN: https://ssrn.com/abstract=3191931 or http://dx.doi.org/10.2139/ssrn.3191931

Nicola Limodio (Contact Author)

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Francesco Strobbe

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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