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Financial Repression, Selective Credits and Endogenous Growth: Orthodoxy and Heresy

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  • Murat Yulek

    ()
    (Islamic Development Bank)

Abstract

In the current orthodoxy it is argued that financial repression is a result of government behavior which aims at obtaining low-cost funds from the financial market. Selective credit policies are seen as a component of financial repression. Further, in this orthodoxy, it is argued that financial repression hinders growth and hence ought to be eliminated. This prescription also advises the abolishment of selective credit mechanisms. In this paper, a simple two-sector model is set up in order to show that governments may institute selective credit policies to internalize existing positive production and investment externalities. It is shown that such a policy is welfare-improving in the context of the model assumptions and that abolishment of selective credits may cause welfare losses. The model also provides a case where financial policy is designed according to the priorities of industrial policy.

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Bibliographic Info

Paper provided by Economic Research Forum in its series Working Papers with number 9604.

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Date of creation: Feb 1996
Date of revision: Feb 1996
Publication status: Published by The Economic Research Forum (ERF)
Handle: RePEc:erg:wpaper:9604

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