Overburdened and Underrated: Understanding the Effects of Financial Repression

Abstract: Financial Repression is increasingly recognized as a viable approach to address high and unsustainable debt levels. Despite its history dating back to the early-mid 1900s, the economic implications of Financial Repression have yet to be fully explored. This paper investigates the effects of Financial Repression, specifically the relationship between two key economic indicators: the exchange rate and the current account. We consider three measures of Financial Repression: Interest Rate Controls, Real Interest Rate, and Taylor Rule Deviation. We use various regression methods in a panel data set, including 90 countries from 1973 to 2017. We find that Financial Repression has a negative effect on the exchange rate, while we find no robust evidence of a relationship between Financial Repression and the current account. Given the discovered impact of Financial Repression on the exchange rate, we discuss the potential outcomes it may entail.