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Financial Repression and External Imbalances

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Abstract

This paper examines how repressive financial policies influence external balances. We argue that financial repression holds back financial development and distorts the process of structural transformation by constraining the service sector and promoting the manufacturing sector, thereby affecting external balances. Using a panel data set of a large number of countries, we find that financial repression has a significant and positive effect on the current account. This result holds for several additional robustness checks, including using medium-term determinants of the current account, alternative measures of external balances, and alternative measures of financial repression. We also show that financial repression mainly affects external balances through its effect on economic structure. When analyzing different repressive financial policies, we find that interest rate controls and capital account controls are the main policies contributing to external imbalances. Furthermore, financial repression has a larger effect on the current account in East Asia than the rest of the world.

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  • Johansson, Anders C. & Wang, Xun, 2012. "Financial Repression and External Imbalances," Working Paper Series 2012-20, Stockholm School of Economics, China Economic Research Center.
    • Handle: RePEc:hhs:hacerc:2012-020
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    Cited by:

    1. Ito, Hiro & Volz, Ulrich, 2012. "The People’s Republic of China and Global Imbalances from a View of Sectorial Reforms," ADBI Working Papers 393, Asian Development Bank Institute.
    2. Johansson, Anders C. & Wang, Xun, 2014. "Financial sector policies and income inequality," China Economic Review, Elsevier, vol. 31(C), pages 367-378.
    3. Samuel Cudré, 2014. "Capital’s long march west: saving and investment frictions in Chinese regions," ECON - Working Papers 161, Department of Economics - University of Zurich.
    4. Johansson, Anders C. & Wang, Xun, 2012. "Financial Sector Policies, Poverty and Inequality," Working Paper Series 2012-24, Stockholm School of Economics, China Economic Research Center.

    More about this item

    Keywords

    External imbalances; Current account; Financial repression; Financial development; Institutional development;
    All these keywords.

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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