IDEAS home Printed from https://ideas.repec.org/p/baf/cbafwp/cbafwp1880.html
   My bibliography  Save this paper

Financial Regulation and Government Revenue: The Effects of a Policy Change in Ethiopia

Author

Listed:
  • Nicola Limodio
  • Francesco Strobbe

Abstract

Financial regulation can generate government revenue by imposing the quantity and price of government bonds. We study an unexpected banking regulation introduced in 2011 by the Ethiopian Central Bank, forcing commercial banks to purchase a negative-yield government bond. High-frequency bank data and public finances documentation allow tracking the subsequent government revenue gain. This policy is compared to three alternatives: raising funds competitively on international markets; distorting the state- owned bank lending; and raising deposits through state-owned bank branches. Our results suggest that the revenue gain is moderate (1.5-2.6% of tax revenue); banks amass more bonds; their profitability slows without turning negative (from 10% to 2%).

Suggested Citation

  • Nicola Limodio & Francesco Strobbe, 2018. "Financial Regulation and Government Revenue: The Effects of a Policy Change in Ethiopia," BAFFI CAREFIN Working Papers 1880, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    • Handle: RePEc:baf:cbafwp:cbafwp1880
    as

    Download full text from publisher

    File URL: https://repec.unibocconi.it/baffic/baf/papers/cbafwp1880.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Varieties of Crises and Their Dates," Introductory Chapters, in: This Time Is Different: Eight Centuries of Financial Folly, Princeton University Press.
    2. Yiping Huang & Xun Wang, 2011. "Does Financial Repression Inhibit or Facilitate Economic Growth? A Case Study of Chinese Reform Experience," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 73, pages 833-855, December.
    3. Carmen M. Reinhart & M. Belen Sbrancia1, 2015. "The liquidation of government debt," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 30(82), pages 291-333.
    4. Limodio,Nicola & Strobbe,Francesco, 2016. "The development impact of financial regulation: evidence from Ethiopia and antebellum USA," Policy Research Working Paper Series 7734, The World Bank.
    5. Charles W. Calomiris & Stephen H. Haber, 2015. "Fragile by Design: The Political Origins of Banking Crises and Scarce Credit," Economics Books, Princeton University Press, edition 1, volume 1, number 10177-2.
    6. International Monetary Fund, 2013. "The Federal Democratic Republic of Ethiopia: 2013 Article IV Consultation," IMF Staff Country Reports 2013/308, International Monetary Fund.
    7. International Monetary Fund, 2013. "Lao People's Democratic Republic: Staff Report for the 2013 Article IV Consultation," IMF Staff Country Reports 2013/369, International Monetary Fund.
    8. repec:rnp:ecopol:09111 is not listed on IDEAS
    9. Davig, Troy & Leeper, Eric M. & Walker, Todd B., 2011. "Inflation and the fiscal limit," European Economic Review, Elsevier, vol. 55(1), pages 31-47, January.
    10. Fischer, Stanley, 1982. "Seigniorage and the Case for a National Money," Journal of Political Economy, University of Chicago Press, vol. 90(2), pages 295-313, April.
    11. Aizenman, Joshua & Marion, Nancy, 2011. "Using inflation to erode the US public debt," Journal of Macroeconomics, Elsevier, vol. 33(4), pages 524-541.
    12. Reinhart, Carmen & Kirkegaard, Jacob & Sbrancia, Belen, 2011. "Financial repression redux," MPRA Paper 31641, University Library of Munich, Germany.
    13. Martin Feldstein & Charles Horioka, 1979. "Domestic Savings and International Capital Flows, W.A. Mackintosh Lecture 1979," Working Paper 331, Economics Department, Queen's University.
    14. Brock, Philip L., 1984. "Inflationary finance in an open economy," Journal of Monetary Economics, Elsevier, vol. 14(1), pages 37-53, July.
    15. Carmen M. Reinhart & Vincent R. Reinhart & Kenneth S. Rogoff, 2012. "Public Debt Overhangs: Advanced-Economy Episodes since 1800," Journal of Economic Perspectives, American Economic Association, vol. 26(3), pages 69-86, Summer.
    16. Jens Hilscher & Alon Raviv & Ricardo Reis, 2022. "Inflating Away the Public Debt? An Empirical Assessment," The Review of Financial Studies, Society for Financial Studies, vol. 35(3), pages 1553-1595.
    17. Demetriades, Panicos O. & Luintel, Kul B., 2001. "Financial restraints in the South Korean miracle," Journal of Development Economics, Elsevier, vol. 64(2), pages 459-479, April.
    18. Nicola Limodio & Francesco Strobbe, 2017. "Bank Deposits and Liquidity Regulation: Evidence from Ethiopia," Working Papers 612, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    19. Thornton Matheson, 2012. "Security transaction taxes: issues and evidence," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 19(6), pages 884-912, December.
    20. Feldstein, Martin & Horioka, Charles, 1980. "Domestic Saving and International Capital Flows," Economic Journal, Royal Economic Society, vol. 90(358), pages 314-329, June.
    21. Beck, T.H.L., 2011. "The Future of Banking," Other publications TiSEM ee6aa8b0-6f3e-4d2e-bb7a-b, Tilburg University, School of Economics and Management.
    22. Espinosa-Vega, Marco A, 1995. "Multiple Reserve Requirements," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(3), pages 762-776, August.
    23. Bacchetta, Philippe & Caminal, Ramon, 1992. "Optimal seigniorage and financial liberalization," Journal of International Money and Finance, Elsevier, vol. 11(6), pages 518-538, December.
    24. Brock, Philip L, 1989. "Reserve Requirements and the Inflation Tax," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 21(1), pages 106-121, February.
    25. Mourmouras, Alex & Russell, Steven, 1992. "Optimal reserve requirements, deposit taxation, and the demand for money," Journal of Monetary Economics, Elsevier, vol. 30(1), pages 129-142, October.
    26. Siegel, Jeremy J, 1981. "Inflation, Bank Profits, and Government Seigniorage," American Economic Review, American Economic Association, vol. 71(2), pages 352-355, May.
    27. Giovannini, Alberto & de Melo, Martha, 1993. "Government Revenue from Financial Repression," American Economic Review, American Economic Association, vol. 83(4), pages 953-963, September.
    28. Cochrane, John H., 2011. "Understanding policy in the great recession: Some unpleasant fiscal arithmetic," European Economic Review, Elsevier, vol. 55(1), pages 2-30, January.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Nicola Limodio, 2015. "The Development Impact of Financial Regulation: Evidence from Ethiopia and Antebellum USA," 2015 Meeting Papers 355, Society for Economic Dynamics.
    2. Jens Hilscher & Alon Raviv & Ricardo Reis, 2022. "Inflating Away the Public Debt? An Empirical Assessment," The Review of Financial Studies, Society for Financial Studies, vol. 35(3), pages 1553-1595.
    3. Carmen M. Reinhart & M. Belen Sbrancia1, 2015. "The liquidation of government debt," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 30(82), pages 291-333.
    4. Carmen M. Reinhart & Franziska L. Ohnsorge & Kenneth S. Rogoff & M. Ayhan Kose, 2022. "The Aftermath of Debt Surges," Annual Review of Economics, Annual Reviews, vol. 14(1), pages 637-663, August.
    5. Huizinga, H.P., 1996. "The Dual Role of Money and Optimal Financial Taxes," Discussion Paper 1996-99, Tilburg University, Center for Economic Research.
    6. Sailesh Tanna & Chengchun Li & Glauco De Vita, 2018. "The role of external debt in the foreign direct investment–growth relationship," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 23(4), pages 393-412, October.
    7. Fentaw Leykun Fisseha, 2023. "Does financial repression inhibit or facilitate private investment? The case of Ethiopia," Future Business Journal, Springer, vol. 9(1), pages 1-14, December.
    8. Reinhart, Carmen M. & Reinhart, Vincent & Rogoff, Kenneth, 2015. "Dealing with debt," Journal of International Economics, Elsevier, vol. 96(S1), pages 43-55.
    9. Patrick Honohan, 1994. "The Fiscal Approach to Financial Intermediation Policy," Papers WP049, Economic and Social Research Institute (ESRI).
    10. Battilossi, Stefano, 2003. "Capital mobility and financial repression in Italy, 1960-1990 : a public finance perspective," IFCS - Working Papers in Economic History.WH wh030602, Universidad Carlos III de Madrid. Instituto Figuerola.
    11. Katagiri, Mitsuru & Konishi, Hideki & Ueda, Kozo, 2020. "Aging and deflation from a fiscal perspective," Journal of Monetary Economics, Elsevier, vol. 111(C), pages 1-15.
    12. Kris James Mitchener & Christoph Trebesch, 2021. "Sovereign Debt in the 21st Century," NBER Working Papers 28598, National Bureau of Economic Research, Inc.
    13. Ichiro Fukunaga & Takuji Komatsuzaki & Hideaki Matsuoka, 2022. "Inflation and public debt reversals in advanced economies," Contemporary Economic Policy, Western Economic Association International, vol. 40(1), pages 124-137, January.
    14. Ansgar Belke & Jonas Keil, 2013. "Niedrigzinsfalle: die Gefahr der finanziellen Repression," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 82(2), pages 113-125.
    15. Carmen M. Reinhart & Kenneth S. Rogoff, 2014. "A Decade of Debt," Central Banking, Analysis, and Economic Policies Book Series, in: Miguel Fuentes D. & Claudio E. Raddatz & Carmen M. Reinhart (ed.),Capital Mobility and Monetary Policy, edition 1, volume 18, chapter 4, pages 97-135, Central Bank of Chile.
    16. Antonio Torrero Mañas, 2014. "España, una recesión de balance," Working Papers 10/14, Instituto Universitario de Análisis Económico y Social.
    17. Bas Aarle & Nina Budina, 1997. "Financial repression, money growth, and seignorage: The Polish experience," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 133(4), pages 683-707, December.
    18. Bo Becker & Victoria Ivashina, 2018. "Financial Repression in the European Sovereign Debt Crisis [Sovereign debt, government myopia and the financial sector]," Review of Finance, European Finance Association, vol. 22(1), pages 83-115.
    19. İbrahim Özmen & Mihai Mutascu, 2024. "Public Debt and Growth: New Insights," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 15(2), pages 8706-8736, June.
    20. Roubini, Nouriel & Sala-i-Martin, Xavier, 1995. "A growth model of inflation, tax evasion, and financial repression," Journal of Monetary Economics, Elsevier, vol. 35(2), pages 275-301, April.

    More about this item

    Keywords

    Financial Regulation; Government Revenue; Bank Taxes; Banks; Ethiopia;
    All these keywords.

    JEL classification:

    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O55 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Africa

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:baf:cbafwp:cbafwp1880. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Michela Pozzi (email available below). General contact details of provider: https://edirc.repec.org/data/cbbocit.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.