Financial Repression refers to a set of governmental policies designed to channel capital towards the state or specific sectors by maintaining interest rates below market equilibrium, often below the rate of inflation. This systematic intervention influences the allocation of savings and investment within an economy. Its primary effect is to reduce the cost of government borrowing.
Mechanism
This typically involves measures such as interest rate caps on deposits and loans, directed credit policies favoring specific industries, high reserve requirements for banks, and capital controls. These mechanisms effectively subsidize public debt and distort natural market forces. The consequence is a redistribution of wealth from savers to borrowers, including the government.
Methodology
The objective is to manage public debt burdens, stimulate specific economic activities, or support domestic financial institutions during periods of stress. This approach often leads to a subtle taxation of savers and prompts investors to seek higher-yielding, less regulated assets. It represents a non-transparent form of public finance, impacting long-term capital formation and investment behavior.
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