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Financial Repression and Structural Imbalances

  • Anders C. Johansson
  • Xun Wang

This paper analyzes the relationship between financial repression and structural change. We present a simple theoretical model of structural transformation in which the impact of financial repression on unbalanced growth is studied. The model suggests that governments may choose to repress the financial sector to allow for continued development of the industry sector while inhibiting growth in the domestic service sector. We then present empirical evidence of financial repression having a significant negative effect on structural transformation. In countries with higher levels of financial repression, the development of the service sector is held back in favor of continued expansion of the industry sector. The results are robust to different country sample compositions, alternative measures of sectoral structure, and different measures of financial repression. The analysis suggests that financial repression may be an important driver of structural imbalances, especially in countries with heavy state intervention and where the government strongly favors industrial expansion. The findings have direct and important policy implications for governments that are experiencing rapid economic transformation due to high economic growth and that also use financial repression to achieve a long-run industrial output growth.

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File URL: http://degit.sam.sdu.dk/papers/degit_17/C017_034.pdf
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Paper provided by DEGIT, Dynamics, Economic Growth, and International Trade in its series DEGIT Conference Papers with number c017_034.

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Length: 40 pages
Date of creation: Sep 2012
Date of revision:
Handle: RePEc:deg:conpap:c017_034
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  1. Nouriel Roubini & Xavier Sala-i-Martin, 1991. "Financial Repression and Economic Growth," NBER Working Papers 3876, National Bureau of Economic Research, Inc.
  2. Baumol, William J & Blackman, Sue Anne Batey & Wolff, Edward N, 1985. "Unbalanced Growth Revisited: Asymptotic Stagnancy and New Evidence," American Economic Review, American Economic Association, vol. 75(4), pages 806-17, September.
  3. L. Rachel Ngai & Christopher Pissarides, 2004. "Structural change in a multi-sector model of growth," LSE Research Online Documents on Economics 3550, London School of Economics and Political Science, LSE Library.
  4. Long KE, 2010. "Comment on “Dissecting the China Puzzle: Asymmetric Liberalization and Cost Distortion”," Asian Economic Policy Review, Japan Center for Economic Research, vol. 5(2), pages 298-299, December.
  5. Ben Gardiner & Ron Martin & Tyler Peter, 2004. "Competitiveness, Productivity and Economic Growth across the European Regions," ERSA conference papers ersa04p333, European Regional Science Association.
  6. Francisco J. Buera & Joseph Kaboski, 2008. "Scale and the origins of structural change," Working Paper Series WP-08-06, Federal Reserve Bank of Chicago.
  7. Daron Acemoglu & Veronica Guerrieri, 2006. "Capital Deepening and Non-Balanced Economic Growth," NBER Working Papers 12475, National Bureau of Economic Research, Inc.
  8. Kevin C. Murdock & Thomas F. Hellmann & Joseph E. Stiglitz, 2000. "Liberalization, Moral Hazard in Banking, and Prudential Regulation: Are Capital Requirements Enough?," American Economic Review, American Economic Association, vol. 90(1), pages 147-165, March.
  9. King, Robert G. & Levine, Ross, 1993. "Finance, entrepreneurship and growth: Theory and evidence," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 513-542, December.
  10. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  11. Pagano, Marco, 1993. "Financial markets and growth: An overview," European Economic Review, Elsevier, vol. 37(2-3), pages 613-622, April.
  12. Kuznets, Simon, 1971. "Modern Economic Growth: Findings and Reflections," Nobel Prize in Economics documents 1971-2, Nobel Prize Committee.
  13. 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.
  14. Huang Yiping, 2010. "Dissecting the China Puzzle : Asymmetric Liberalization and Cost Distortion," Macroeconomics Working Papers 22874, East Asian Bureau of Economic Research.
  15. An, Galina & Iyigun, Murat F., 2004. "The export skill content, learning by exporting and economic growth," Economics Letters, Elsevier, vol. 84(1), pages 29-34, July.
  16. Chi Hung KWAN, 2010. "Comment on “Dissecting the China Puzzle: Asymmetric Liberalization and Cost Distortion”," Asian Economic Policy Review, Japan Center for Economic Research, vol. 5(2), pages 296-297, December.
  17. repec:cto:journl:v:21:y:2001:i:1:p:77-90 is not listed on IDEAS
  18. Francisco J. Buera & Joseph P. Kaboski, 2009. "Can Traditional Theories of Structural Change Fit The Data?," Journal of the European Economic Association, MIT Press, vol. 7(2-3), pages 469-477, 04-05.
  19. Crespo Jorge & Martín Carmela & Velázquez Francisco J, 2004. "The Role of International Technology Spillovers in the Economic Growth of the OECD Countries," Global Economy Journal, De Gruyter, vol. 4(2), pages 1-20, December.
  20. Foellmi, Reto & Zweimüller, Josef, 2008. "Structural change, Engel's consumption cycles and Kaldor's facts of economic growth," Journal of Monetary Economics, Elsevier, vol. 55(7), pages 1317-1328, October.
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