Financial Repression in a Small Open Economy: The Case of Laos

Using a DSGE model, we examine the effects of financial repression policies on the Lao economy. Facing a high level of external debt, the Lao government is likely to rely increasingly on domestic financing, thereby creating incentives to use financial repression. We consider two types of financial repression policies: requiring domestic banks to increase their holdings of government bonds and repressing the government's interest payments through a tax on banks' returns on government bonds. Our numerical experiments show that both policies crowd out capital investment, reduce output, and ultimately worsen the government's primary balance. These results suggest that financial repression may worsen the government's fiscal condition despite its intended purpose of easing the fiscal burden.