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Financial Repression and External Imbalances

This paper examines how repressive financial policies influence external balances. We argue that financial repression holds back financial development and distorts the process of structural transformation by constraining the service sector and promoting the manufacturing sector, thereby affecting external balances. Using a panel data set of a large number of countries, we find that financial repression has a significant and positive effect on the current account. This result holds for several additional robustness checks, including using medium-term determinants of the current account, alternative measures of external balances, and alternative measures of financial repression. We also show that financial repression mainly affects external balances through its effect on economic structure. When analyzing different repressive financial policies, we find that interest rate controls and capital account controls are the main policies contributing to external imbalances. Furthermore, financial repression has a larger effect on the current account in East Asia than the rest of the world.

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File URL: http://swopec.hhs.se/hacerc/papers/hacerc2012-020.pdf
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Paper provided by China Economic Research Center, Stockholm School of Economics in its series Working Paper Series with number 2012-20.

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Length: 33 pages
Date of creation: 19 Mar 2012
Date of revision:
Handle: RePEc:hhs:hacerc:2012-020
Contact details of provider: Postal: China Economic Research Center, Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden
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Web page: http://www.hhs.se/en/Research/Institutes/SCERI/

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