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From Financial Repression to External Distress: The Case of Venezuela

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Listed:
  • Reinhart, Carmen

    (Harvard University)

  • Santos, Miguel Angel

    (Harvard University)

Abstract

The literature on external default has stressed the existence of the so-called debt-intolerance puzzle: developing nations tend to default at debt-to-GDP ratios well bellow those of developed countries. The underestimation or plain omission of domestic debt may account for a fraction of that puzzle. We calculate fiscal revenues coming from financial repression using different methodologies for the case of Venezuela, and look at their correspondence with comprehensive measures of capital flight. In particular, we add to the standard measure of capital flight the over-invoicing of imports, rife in periods of exchange controls. We find that financial repression accounts for public revenues similar to those of OECD economies, in spite of the latter having much higher domestic debt-to-GDP ratios. We also find that financial repression and capital flight are significantly higher in years of exchange controls and interest rate caps. We interpret this as significant evidence suggesting a link between domestic disequilibrium and a weakening of the net foreign asset position via capital flight.

Suggested Citation

  • Reinhart, Carmen & Santos, Miguel Angel, 2015. "From Financial Repression to External Distress: The Case of Venezuela," Working Paper Series rwp15-018, Harvard University, John F. Kennedy School of Government.
  • Handle: RePEc:ecl:harjfk:rwp15-018
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    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. Bartolini, Leonardo & Drazen, Allan, 1997. "When liberal policies reflect external shocks, what do we learn?," Journal of International Economics, Elsevier, vol. 42(3-4), pages 249-273, May.
    3. Carmen M. Reinhart & Kenneth S. Rogoff, 2014. "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," Annals of Economics and Finance, Society for AEF, vol. 15(2), pages 1065-1188, November.
    4. Easterly, William R., 1989. "Fiscal adjustment and deficit financing during the debt crisis," Policy Research Working Paper Series 138, The World Bank.
    5. Diaz-Alejandro, Carlos, 1985. "Good-bye financial repression, hello financial crash," Journal of Development Economics, Elsevier, vol. 19(1-2), pages 1-24.
    6. Geoffrey J Bannister & Luis D Barrot, 2011. "A Debt Intolerance Framework Applied to Central America, Panama and the Dominican Republic," IMF Working Papers 11/220, International Monetary Fund.
    7. Reinhart, Carmen & Rogoff, Kenneth, 2009. "This Time It’s Different: Eight Centuries of Financial Folly-Chapter 1," MPRA Paper 17452, University Library of Munich, Germany.
    8. Pablo D'Erasmo & Enrique G. Mendoza, 2016. "Distributional Incentives In An Equilibrium Model Of Domestic Sovereign Default," Journal of the European Economic Association, European Economic Association, vol. 14(1), pages 7-44, February.
    9. Carmen M. Reinhart & Kenneth S. Rogoff, 2004. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," The Quarterly Journal of Economics, Oxford University Press, vol. 119(1), pages 1-48.
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    13. Mark Aguiar & Manuel Amador & Emmanuel Farhi & Gita Gopinath, 2013. "Crisis and Commitment: Inflation Credibility and the Vulnerability to Sovereign Debt Crises," NBER Working Papers 19516, National Bureau of Economic Research, Inc.
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    17. Giovannini, Alberto & de Melo, Martha, 1993. "Government Revenue from Financial Repression," American Economic Review, American Economic Association, vol. 83(4), pages 953-963, September.
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    More about this item

    JEL classification:

    • E66 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General Outlook and Conditions
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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