FINANCIAL REPRESSION AND ECONOMIC-GROWTH

This paper presents a theoretical and empirical analysis of the relation between policies of financial repression and long-term growth. We present a model of financial repression, inflationary finance and endogenous growth. The model suggests that governments might choose to repress the financial sector because this policy increases the demand for money and delivers easy inflationary revenues. We also show that policies of financial repression reduce the growth rate of the economy. Next, we present the empirical evidence on the relation between measures of financial repression and growth in a large cross-section of countries. The implications of the theory are confirmed in that, after controlling for other determinants of growth, various measures of financial repression affect growth negatively, inflation rates (and banks' reserve ratios) and growth are negatively related. We also find that, after controlling for policies of financial repression, a regional dummy for Latin America in growth regressions tends to be insignificant. This suggests that a fraction of the weak growth experience of the Latin American countries might be explained by the policies of financial repression followed by the governments in this region.