Working Paper: CEPR ID: DP2253
Authors: Charles Wyplosz
Abstract: In the real world of less than perfect markets, balancing the benefits and costs of financial liberalization is usually impossible ex ante. Having been slow to liberalize, postwar Europe offers a possible testing ground. Looking at the experience in Belgium, France and Italy, a number of interesting lessons can be learnt. There is no discernible growth effect of financial repression in the sample studied here. Credit ceilings do not reduce the volatility or the level of nominal interest rates but they succeed in lowering the average real interest rate level. Capital controls keep interest rates down but increase their volatility. Financial restraints have been used to provide cheap financing of public sector deficits and to support industrial policies, but have undermined fiscal discipline and monetary control. Upon liberalization, the rent created by financial repression, initially captured by the public sector, did not disappear but shifted towards the personnel .
Keywords: financial repression; liberalization; banking; credit ceilings; capital controls
JEL Codes: E51; E60; F21; G14; G18; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Financial repression (G28) | Lower real interest rates (E43) |
| Capital controls (F38) | Increased interest rate volatility (E43) |
| End of financial repression (G18) | Increased competition in the banking sector (G21) |
| End of financial repression (G18) | No adverse effects on profitability (G39) |
| Financial repression (G28) | No adverse effects on economic growth (F69) |