Working Paper: CEPR ID: DP8947
Authors: Carmen Reinhart
Abstract: Periods of high indebtedness have historically been associated with a rising incidence of default or restructuring of public and private debts. Sometimes the debt restructuring is more subtle and takes the form of 'financial repression'. Consistent negative real interest rates are equivalent to a tax on bond holders and, more generally, savers. In the heavily regulated financial markets of the Bretton Woods system, a variety of financial domestic and international restrictions facilitated a sharp and rapid reduction or 'liquidation' of public debt from the late 1940s to the 1970s. The restrictions or regulatory measures of that era had their origins in what would now come under the heading of 'macroprudential' concerns in the wake of the severe banking crises that swept many countries in the early 1930s. The surge in public debts that followed during the Great Depression and through World War II only made the case for stable and low interest rates and directed credit more compelling to policymakers. The resurgence of financial repression in the wake of the 2007-2009 financial crises alongside the surge in public debts in advanced economies is documented here. This process of financial 'de-globalization' may have only just begun.
Keywords: capital controls; debt; financial repression; inflation; interest rates; regulation
JEL Codes: E2; E3; E6; F3; F4; H6; N10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Financial repression (G28) | Debt reduction (H63) |
| Negative real interest rates (E43) | Financial repression (G28) |
| Negative real interest rates (E43) | Tax on savers and bondholders (F38) |
| Tax on savers and bondholders (F38) | Debt reduction (H63) |
| Imposition of negative real interest rates (E43) | Transfer of wealth from creditors to borrowers (G51) |
| Transfer of wealth from creditors to borrowers (G51) | Ability of governments to service and reduce debt burdens (H63) |
| Expansive monetary policies (E62) | Negative real interest rates (E43) |