Topic > financial repression - 684

Introduction and overviewThe topic of financial development and growth has always been an area that has received great attention in the last two decades. One of these is financial repression, was what Cole (1974) referred to as a term used to characterize a state in an economy in which interest rates are avoided from determining the equilibrium rate of supply and demand of currency. In other words, it is a set of government rules and regulations and other non-market restrictions that inhibit an economy's financial intermediaries from maximizing their production (Ito 2008 p. 430). The genesis of this theory dates back to the 1970s, thanks to the pioneers of two renowned economists Edward S. Shaw and Ronald I. McKinnon. Deriving from this definition, I define financial repression as government activities and regulations put in place to reduce debt, although this has been argued by many economists to have a mixed effect on economic growth. Historically, financial repression has involved a variety of government policies; interest rate controls, high bank reserve requirements, capital controls, strict financial sector access requirements, liquidity ratio requirements, limited credit allocations, government control and ownership of banks, and credit ceilings (floors) among many others Xu G. & Gui B. (2013).The remainder of this article is organized in the following order. There is a brief discussion of the theory of financial repression, followed by a critique of the theory. Next is an assessment of the complicated relationship between financial repression and economic performance, then a case study of China, and finally the conclusion and observations. The theory of financial repression Financial repression arises from... middle of paper... ...negative relationship between the repression of interest rates and basic macroeconomic factors such as economic growth, saving and investment. For example, Fry (1978) tested the work of Shaw (1973) and McKinnon (1973) and their alternative theories for seven LDCs (LDCs) in Asia and concluded that the real interest rate has an effect significantly positive on domestic savings and the economy. Fry's (1997) reports suggest that measuring financial distortions with black market exchange premium rates and squared real interest rates lowers investment ratios ultimately leading to a reduction in growth output. In the same vein, Roubini and Sala-i-Martin (1992) also revealed that financial repression is negatively related to growth while controlling other determinants of growth; thus interest rates (bank reserve requirements) are inversely related to growth.