The consequences of ‘upward financial repression’

Abstract

Developing nations are frequently advised to raise administered financial rates above expected inflation rates in stabilization and structural adjustment programmes. In depressed or severely distorted economies, however, market-clearing real financial rates may be non-positive. In such circumstances, attempts to force financial rates above market-clearing levels may impede economic recovery and contribute to industrial and financial-system decapitalization. Moreover, policy-makers may effectively be forced to allow inflation to finance payment of excessively high rates. Where financial rates must be administered, policy-makers should aim to equilibrate financial supply and demand, with a view to maintaining financial-system profitability and safety. Policy-makers should regard sustainable positive real financial rates as indicators of a soundly functioning economy, hence as something to achieve, not to force.