Financial Repression and Exchange Rate Management in Developing Countries; Theory and Empirical Evidence for India
Most developing countries have imposed restrictions on domestic and international financial transactions at one time or another. Such restrictions have allowed governments to generate significant proportions of their revenues from financial repression while restraining inflation. The eventual fiscal importance of the revenues from seignorage and from implicit taxation of financial intermediation pose a challenge for financial reform and liberalization. This paper presents a model of the role of financial repression in fiscal policy and exchange rate management under capital controls. We show how a balance of payments crisis arises under an exchange rate peg without capital account convertibility in the model economy and how the instruments of financial repression may be used for exchange rate management. The model is compared to the experience of India, a country that exemplifies the fiscal importance of financial restrictions, in the last two decades. In particular, we discuss the dynamics leading up to devaluation in 1991 and the role of financial repression in exchange rate intervention afterwards.
|Date of creation:||01 Aug 2001|
|Date of revision:|
|Contact details of provider:|| Postal: International Monetary Fund, Washington, DC USA|
Phone: (202) 623-7000
Fax: (202) 623-4661
Web page: http://www.imf.org/external/pubind.htm
More information through EDIRC
|Order Information:||Web: http://www.imf.org/external/pubs/pubs/ord_info.htm|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Nouriel Roubini & Xavier Sala-i-Martin, 1992.
"A Growth Model of Inflation, Tax Evasion, and Financial Repression,"
NBER Working Papers
4062, National Bureau of Economic Research, Inc.
- 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.
- Roubini, N. & Sala-i-Martin, X., 1992. "A Growth Model of Inflation, Tax Evasion and Financial Repression," Papers 658, Yale - Economic Growth Center.
- Mendoza, Enrique G, 1991. "Real Business Cycles in a Small Open Economy," American Economic Review, American Economic Association, vol. 81(4), pages 797-818, September.
- Panicos Demetriades & Kul B. Luintel, 1995.
"The Direct Costs of Financial Repression: Evidence from India,"
Keele Department of Economics Discussion Papers (1995-2001)
95/12, Department of Economics, Keele University.
- Panicos O. Demetriades & Kul B. Luintel, 1997. "The Direct Costs Of Financial Repression: Evidence From India," The Review of Economics and Statistics, MIT Press, vol. 79(2), pages 311-320, May.
- Bencivenga, V.R. & Smith, B.D., 1990.
"Deficits, Inflation, And The Banking System In Developing Countries: The Optimal Degree Of Financial Repression,"
RCER Working Papers
214, University of Rochester - Center for Economic Research (RCER).
- Bencivenga, Valerie R & Smith, Bruce D, 1992. "Deficits, Inflation, and the Banking System in Developing Countries: The Optimal Degree of Financial Repression," Oxford Economic Papers, Oxford University Press, vol. 44(4), pages 767-90, October.
- Courakis, Anthony S, 1984. "Constraints on Bank Choices and Financial Repression in Less Developed Countries," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 46(4), pages 341-70, November.
- Craig Burnside & Martin Eichenbaum & Sergio T. Rebelo, 2001.
"On the Fiscal Implications of Twin Crises,"
RCER Working Papers
482, University of Rochester - Center for Economic Research (RCER).
- Burnside, Craig & Eichenbaum, Martin & Rebelo, Sérgio, 2001. "On the Fiscal Implications of Twin Crises," CEPR Discussion Papers 2918, C.E.P.R. Discussion Papers.
- Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 2001. "On the Fiscal Implications of Twin Crises," NBER Working Papers 8277, National Bureau of Economic Research, Inc.
- Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 2001. "On the fiscal implications of twin crises," Working Paper Series WP-01-02, Federal Reserve Bank of Chicago.
- Paul Cashin & Nilss Olekalns & Ratna Sahay, 1998.
"Tax Smoothing in a Financially Repressed Economy; Evidence from India,"
IMF Working Papers
98/122, International Monetary Fund.
- Cashin, P. & Olekalns, N. & Sahay, R., 1998. "Tax Smoothing in a Financially Repessed Economy: Evidence from India," Department of Economics - Working Papers Series 656, The University of Melbourne.
- Guillermo A. Calvo & Carmen M. Reinhart, 2002.
"Fear of Floating,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 117(2), pages 379-408.
- Brock, Philip L, 1989. "Reserve Requirements and the Inflation Tax," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 21(1), pages 106-21, February.
- Nichols, Donald A, 1974. "Some Principles of Inflationary Finance," Journal of Political Economy, University of Chicago Press, vol. 82(2), pages 423-30, Part I, M.
- Renu Kohli, 2001. "Capital Flows and Their Macroeconomic Effects in India," IMF Working Papers 01/192, International Monetary Fund.
- Demetriades, Panicos O & Luintel, Kul B, 1996. "Financial Development, Economic Growth and Banker Sector Controls: Evidence from India," Economic Journal, Royal Economic Society, vol. 106(435), pages 359-74, March.
- Sussman, Oren, 1991. "Macroeconomic Effects of a Tax on Bond Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(3), pages 352-66, August.
- Robert G. King & Ross Levine, 1993.
"Finance and Growth: Schumpeter Might Be Right,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 108(3), pages 717-737.
- Giovannini, Alberto & de Melo, Martha, 1993. "Government Revenue from Financial Repression," American Economic Review, American Economic Association, vol. 83(4), pages 953-63, September.
- Gupta, Kanhaya L. & Lensink, Robert, 1997. "Financial repression and fiscal policy," Journal of Policy Modeling, Elsevier, vol. 19(4), pages 351-373, August.
- Diaz-Alejandro, Carlos, 1985. "Good-bye financial repression, hello financial crash," Journal of Development Economics, Elsevier, vol. 19(1-2), pages 1-24.
When requesting a correction, please mention this item's handle: RePEc:imf:imfwpa:01/103. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jim Beardow)or (Hassan Zaidi)
If references are entirely missing, you can add them using this form.