Financial Repression: Evidence and Theory
V.V. Chari, Consultant
Patrick J. Kehoe, Consultant
March 2016 | Federal Reserve Bank of Minneapolis Economic Policy Paper 16-4 | With Alessandro Dovis
“Financial repression”—policies that allow a government to place its debt with financial institutions at relatively low interest rates—has been used widely for centuries. This essay focuses on one important form of repression: requiring financial intermediaries to hold more government bonds than they would if policies didn’t require it. We argue that this policy should only be used when the government has an urgent need to issue debt and has difficulty issuing new debt because of potential lender doubts about the government’s ability to repay.
This research suggests that policies that allow financial institutions to hold only small amounts of their own country’s government bonds may not be desirable.