Financial Repression in General Equilibrium: The Case of the United States, 1948–1974

Financial repression lowers the return on government debt and contributes, all else equal, towards its liquidation. However, its full effect on the debt-to-GDP ratio hinges on how repression impacts the economy at large because it alters investment and saving decisions. We develop and estimate a New Keynesian model with financial repression. Based on U.S. data for the period 1948–1974, we find, consistent with earlier work, that repression was pervasive but gradually phased out. A model-based counterfactual shows that GDP would have been 5 percent lower, and the debt-to-GDP ratio 20 percentage points higher, had repression not been phased out.

Keywords: Financial repression, Government debt, Interest rates, Banks, Regulation, Bayesian estimation

JEL Classification: H63,E43,G28

Suggested Citation: Suggested Citation

Kliem, Martin and Kriwoluzky, Alexander and Müller, Gernot J. and Scheer, Alexander, Financial Repression in General Equilibrium: The Case of the United States, 1948–1974 (March 2024). DIW Berlin Discussion Paper No. 2075, Available at SSRN: https://ssrn.com/abstract=4785283 or http://dx.doi.org/10.2139/ssrn.4785283