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Financial Repression and Populism
[Финансовая Репрессия И Популизм]


  • Norkina, Olga A. (Норкина, Ольга А.)

    (National Research University Higher School of Economics)


Due to its implicit nature, financial repression is a convenient fiscal policy measure for the populist government. Financial repression gives the populist government the opportunity to finance more government spending with less explicit taxes. The optimal parameters of financial repression in the form of nonmarket debt placement are determined for the populist government. Populism is introduced by the choice of government spending and tax on capital higher and lower respectively than those chosen through voting procedure. The overlapping generations model with a fully funded pension system and financial repression is used to determine the optimal fiscal policy of the populist government. Moreover, the influence of the two fiscal regimes on household welfare is considered. It is shown that financial repression in the form of nonmarket debt placement is an element of the optimal fiscal policy for the populist government. Such government will set the gross interest rate on government bonds lower than the gross interest on capital by placing its debt in the captive pension fund. This leads to the fall in the pension fund’s yield and to the decrease in household wealth. The optimal repressed interest rate on government bonds is higher the bigger the population growth rate is, the less the government is addicted to populism and the lower is the elasticity of substitution between consumption and government spending. We also show that the financial repression regime under populism is associated with higher welfare compared to the voting regime without populism. This result is the consequence of the fact that the populist policy allows the reduction of the distorting capital tax rate and its replacement by lump-sum financial repression.

Suggested Citation

  • Norkina, Olga A. (Норкина, Ольга А.), 2018. "Financial Repression and Populism
    [Финансовая Репрессия И Популизм]
    ," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 1, pages 122-147, February.
  • Handle: RePEc:rnp:ecopol:ep1805

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    References listed on IDEAS

    1. Natalia Melgar & Máximo Rossi, 2012. "A Cross‐Country Analysis of the Risk Factors for Depression at the Micro and Macro Levels," American Journal of Economics and Sociology, Wiley Blackwell, pages 354-376.
    2. Becerra, O. & Cavallo, E. & Scartascini, C., 2012. "The politics of financial development: The role of interest groups and government capabilities," Journal of Banking & Finance, Elsevier, vol. 36(3), pages 626-643.
    3. Carmen M. Reinhart & M. Belen Sbrancia1, 2015. "The liquidation of government debt," Economic Policy, CEPR;CES;MSH, vol. 30(82), pages 291-333.
    4. Miguel Urrutia, 1991. "On the Absence of Economic Populism in Colombia," NBER Chapters,in: The Macroeconomics of Populism in Latin America, pages 369-391 National Bureau of Economic Research, Inc.
    5. Reinhart, Carmen & Kirkegaard, Jacob & Sbrancia, Belen, 2011. "Financial repression redux," MPRA Paper 31641, University Library of Munich, Germany.
    6. Gupta, Rangan, 2008. "Tax evasion and financial repression," Journal of Economics and Business, Elsevier, vol. 60(6), pages 517-535.
    7. Bai, Chong-En & Li, David D. & Qian, Yingyi & Wang, Yijiang, 2001. "Financial repression and optimal taxation," Economics Letters, Elsevier, vol. 70(2), pages 245-251, February.
    8. Olga A. Norkina & Sergey E. Pekarski, 2014. "Optimal Financial Repression," HSE Working papers WP BRP 81/EC/2014, National Research University Higher School of Economics.
    9. Rudiger Dornbusch & Sebastian Edwards, 1991. "Introduction to "The Macroeconomics of Populism in Latin America"," NBER Chapters,in: The Macroeconomics of Populism in Latin America, pages 1-4 National Bureau of Economic Research, Inc.
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    More about this item


    financial repression; populism; optimal fiscal policy; overlapping generations; budget deficit; voting in the absence of populism.;

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H61 - Public Economics - - National Budget, Deficit, and Debt - - - Budget; Budget Systems


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