Financial Repression

What is 'Financial Repression'

Financial repression is a term that describes measures by which governments channel funds to themselves as a form of debt reduction. This concept was introduced in 1973 by Stanford economists Edward S. Shaw and Ronald I. McKinnon. Financial repression can include such measures as directed lending to the government, caps on interest rates, regulation of capital movement between countries and a tighter association between government and banks. The term was initially used in response to the emerging market financial systems during the 1960s, '70s and '80s.

BREAKING DOWN 'Financial Repression'

In 2011, economists Carmen M. Reinhart and M. Belen Sbrancia hypothesized in a National Bureau of Economic Research (NBER) working paper entitled "The Liquidation of Government Debt" that governments could return to financial repression to deal with debt following the 2008 economic crisis.
Reinhart and Sbrancia indicate that financial repression features:

  1. Caps or ceilings on interest rates
  2. Government ownership or control of domestic banks and financial institutions
  3. Creation or maintenance of a captive domestic market for government debt
  4. Restrictions on entry to the financial industry
  5. Directing credit to certain industries