A study on financial repression in the context of Nepal
Date
2022
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
Department of Economics
Abstract
American Economists Ronald McKinnon and Edward Shaw in 1973 labelled the set of
well-intended but counterproductive financial policy as financial repression (FR) in
relation to slower development of South Korea. Major tools for financially repressive
policy are interest control, capital control, foreign exchange control, forced reserve
requirement and appropriation of credit. They have huge implication in savings,
consumption, and investment and government finance from macroeconomic
perspective. For example, the forced interest rate below market clearing rate may
increase demand of loan causing imbalance with supply which may bring the
uneconomic rationing of loans and may cause inefficiency and dead weight loss. It may
distribute the financial welfare from savers to burrowers.
This study tries to study the FR policy tools from the perspective of the development of
economic theories and policies globally from different angle: for and against. Also, this
study tries to analyze the Nepalese macroeconomic indicators. It mainly focuses in
three parts: the effect of FR in government finance, relation of FR to economic growth
and finally the channels (saving-investment or volume channel and efficiency channel).
Since, the present study is only indicative, simple tools of analysis such as time series
plot, correlation, lagged correlation were used.
The findings revealed that the government revenue is positively correlated with FR
policy tools. Saving and investment are not very well correlated with FR policy tools.
The reason may be the price signal distortion due to capital and foreign exchange
control. Efficiency of investment is negatively correlated to FR policy tools such as
interest rate and money supply. In the existing scenario, long term growth may have
relation to long term growth through efficiency channel.
Almost all of government practices includes some form of FR for the purpose of
optimization of revenue, to mitigate the future risk of default and to direct financial
resources in the desired directions. As compared to tax policy for the government, the
financial policy tools are intricate, complex and less debated, but their effect are long
term in nature. So, it is very important that the effect of financial policies should be
examined periodically to ensure that they do not create FR and adversely affect savinginvestment
channels and their
efficiencies.
Description
Keywords
Financial repression, Nepalese economy