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Financial Repression in General Equilibrium: The Case of the United States, 1948–1974

Author

Listed:
  • Martin Kliem
  • Alexander Kriwoluzky
  • Gernot J. Müller
  • Alexander Scheer

Abstract

Financial repression lowers the return on government debt and contributes, all else equal, towards its liquidation. However, its full effect on the debt-to-GDP ratio hinges on how repression impacts the economy at large because it alters investment and saving decisions. We develop and estimate a New Keynesian model with financial repression. Based on U.S. data for the period 1948–1974, we find, consistent with earlier work, that repression was pervasive but gradually phased out. A model-based counterfactual shows that GDP would have been 5 percent lower, and the debt-to-GDP ratio 20 percentage points higher, had repression not been phased out.

Suggested Citation

  • Martin Kliem & Alexander Kriwoluzky & Gernot J. Müller & Alexander Scheer, 2024. "Financial Repression in General Equilibrium: The Case of the United States, 1948–1974," Discussion Papers of DIW Berlin 2075, DIW Berlin, German Institute for Economic Research.
    • Handle: RePEc:diw:diwwpp:dp2075
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    Keywords

    Financial repression; Government debt; Interest rates; Banks; Regulation; Bayesian estimation;
    All these keywords.

    JEL classification:

    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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