Financial Repression in the XXIst Century

Large stocks of public and external debt tempt policymakers to extract resources from their creditors. This article characterizes three broad forms of financial repression that serve this purpose. The first consists of direct taxation of the financial sector through levies on financial transactions, banks’ income, or pension-fund assets. The second is a sudden and sufficiently persistent devaluation of the currency. The third raises the demand for the non-monetary services provided by different types of government liabilities while keeping their supply scarce, thereby creating yield discounts. Reviewing historical experience, including recent years, the article concludes that each of these revenue sources can occasionally be large, but that policies designed to exploit them often fail. Financial repression is an alluring but ultimately illusory temptation: yielding to it typically generates substantial efficiency losses while producing only limited revenue.