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An Estimation of Impact of Financial Repression on Budget Revenues

Listed author(s):
  • Isakov, Kanat S.

    ()

  • Pekarski, Sergey E.

    ()

    (Department of Theoretical Economics, National Research University Higher School of Economics)

Modern financial repression in developed countries takes the form of various measures aimed at increasing the placement of public debt with a below-market or even negative real rate of return. It provides governments with an additional revenue or liquidates their debt. But financial repression is a hidden tax on wealth, which introduce additional distortions into the economy and thus affects the base of traditional taxes. In this paper we introduce financial repression into the neoclassical dynamic general equilibrium model to assess its overall impact on government revenues. Following the framework of Trabandt and Uhlig (2011) we estimate Laffer curves for USA and the set of European countries. We show, that tighter repression shifts Laffer curves for consumption and labor-income taxes down, but actually increases the revenue from capital-income taxation. As a result, and despite a decrease in output, financial repression leads to an increase in government purchases. We also estimate marginal rates of substitutions between different policy instruments and show, that while the U.S. economy cannot loosen repression without forgoing government purchases or increasing traditional taxes, European economies are on the wrong side of the Laffer hill for financial repression that allows decreasing public debt and increasing its rate of return.

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Article provided by Russian Presidential Academy of National Economy and Public Administration in its journal Economic Policy.

Volume (Year): 5 (2016)
Issue (Month): (October)
Pages: 28-49

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Handle: RePEc:rnp:ecopol:ep1652
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  1. Reinhart, C. M., 2012. "The return of financial repression," Financial Stability Review, Banque de France, issue 16, pages 37-48, April.
  2. Cooley, Thomas F. & Hansen, Gary D., 1992. "Tax distortions in a neoclassical monetary economy," Journal of Economic Theory, Elsevier, vol. 58(2), pages 290-316, December.
  3. S. Moiseev., 2002. "The Political Economy of Financial Repression," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 12.
  4. Carmen M. Reinhart & M. Belen Sbrancia1, 2015. "The liquidation of government debt," Economic Policy, CEPR;CES;MSH, vol. 30(82), pages 291-333.
  5. Trabandt, Mathias & Uhlig, Harald, 2011. "The Laffer curve revisited," Journal of Monetary Economics, Elsevier, vol. 58(4), pages 305-327.
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