Financial Repression and Exchange Rate Management in Developing Countries: Theory and Empirical Evidence for India

August 1, 2001

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Renu Kohli, and Kenneth Kletzer. Financial Repression and Exchange Rate Management in Developing Countries: Theory and Empirical Evidence for India, (USA: International Monetary Fund, 2001) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Most developing countries have imposed restrictions on domestic and international financial transactions at one time or another. Such restrictions have allowed governments to generate significant proportions of their revenues from financial repression while restraining inflation. The eventual fiscal importance of the revenues from seignorage and from implicit taxation of financial intermediation pose a challenge for financial reform and liberalization. This paper presents a model of the role of financial repression in fiscal policy and exchange rate management under capital controls. We show how a balance of payments crisis arises under an exchange rate peg without capital account convertibility in the model economy and how the instruments of financial repression may be used for exchange rate management. The model is compared to the experience of India, a country that exemplifies the fiscal importance of financial restrictions, in the last two decades. In particular, we discuss the dynamics leading up to devaluation in 1991 and the role of financial repression in exchange rate intervention afterwards.

Subject: Bank credit, Banking, Domestic credit, Exchange rates, External debt, Fiscal policy, Foreign exchange, Money, Public debt

Keywords: Balance of payments crises, Commercial bank, Current account, Domestic credit, Exchange rate, Exchange rate movement, Exchange rate peg, Exchange rates, Financial repression, Global, Managed float, Nominal rate, Rate of depreciation, Spot market, WP

Publication Details

Pages:

42
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2001/103
Stock No:

WPIEA1032001
ISBN:

9781451852691
ISSN:

1018-5941

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