Financial repression is a political and economic tool that is often used to curb financial instability. It is a form of fiscal restriction that aims to control money markets and discourage excessive risk-taking. The concept of financial repression can be applied to a variety of financial instruments and processes, from interest rate ceilings to bank reserve requirements. In addition, it can be used to restrict foreign exchange flows and to increase domestic resources flowing to the public sector.
A common example of financial repression is quantitative easing, which involves central banks buying up government debt from banks. This creates an increase in demand for government bonds, which in turn lowers the interest rate on them. This is one of the two main forms of financial repression. QE has helped governments borrow money at low interest rates, which has helped them meet their debt obligations.
Financial repression policies do not necessarily impede growth. Some countries have found that financial repression may actually promote the development of a country. In South Korea and Japan, for example, financial repression has actually accelerated industrialisation and economic growth. And while some economists argue that FDI outflows will increase if the economy is repressive, the authors say that this is not necessarily the case.
