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Financial Repression in General Equilibrium: The Case of the United States, 1948–1974

Discussion Papers 2075, 47 S.

Martin Kliem, Alexander Kriwoluzky, Gernot J. Müller, Alexander Scheer


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Financial repression lowers the return on government debt and contributes, all else equal, towards its liquidation. However, its full effect on the debt-to-GDP ratio hinges on how repression impacts the economy at large because it alters investment and saving decisions. We develop and estimate a New Keynesian model with financial repression. Based on U.S. data for the period 1948–1974, we find, consistent with earlier work, that repression was pervasive but gradually phased out. A model-based counterfactual shows that GDP would have been 5 percent lower, and the debt-to-GDP ratio 20 percentage points higher, had repression not been phased out.

Alexander Kriwoluzky

Head of Department in the Macroeconomics Department

JEL-Classification: H63;E43;G28
Keywords: Financial repression, Government debt, Interest rates, Banks, Regulation, Bayesian estimation