Exogenous Shocks and Inflation Under Conditions of Financial Repression
https://doi.org/10.18288/1994-5124-2022-6-8-39
Abstract
Financial repression refers to the distorting effect of certain government policies on the operation of the financial sector. Several empirical studies of financial repression point out that financial repression retards economic growth by decreasing investment activity in the economy, but the impact of financial repression on inflationary processes has not been adequately studied. This paper examines how inflation and other macroeconomic indicators would respond to an oil price shock when financial repression is or is not in place. Financial repression affects household consumption, and that increases the inflationary response to external shocks. The article constructs a standard dynamic stochastic general equilibrium (DSGE) model of a small exporting economy operating under financial repression. The financial repression takes the form of a government cap on interest rates for a certain proportion of loans available to households. The model is calibrated to resemble the economy of Kazakhstan, where the policy rate for lending applies to more than 20% of the credit market. However, the calibration and structure of the model are broadly typical of exporting economies, and the conclusions drawn from the model are therefore qualitatively applicable to exporting economies in general. The model demonstrates that financial repression increases the impact of external shocks not only on inflation, but also on output, employment, and the effective interest rate. When the effectiveness of a central bank’s ability to maintain inflation targets with minimal volatility is judged according to the Taylor Rule, these results imply that financial repression makes it more difficult for central banks to reach that goal.
About the Authors
Y. A. Pak
National Research University Higher School of Economics
Russian Federation
Russian Federation
Yevgenia A. Pak, Postgraduate Student of the Department of Theoretical Economics
11, Pokrovskiy bul., Moscow, 109028
S. E. Pekarski
National Research University Higher School of Economics
Russian Federation
Russian Federation
Sergey E. Pekarski, Cand. Sci. (Econ.), Professor of the Department of Theoretical Economics
11, Pokrovskiy bul., Moscow, 109028
References
1. Andreev M., Polbin A. Issledovanie effekta finansovogo akseleratora v DSGE modeli s opisaniem proizvodstva eksportnogo produkta [Study of the Results of a Financial Accelerator in DSGE Models With a Description of Export Production]. Zhurnal Novoy ekonomicheskoy assotsiatsii [Journal of the New Economic Association], 2019, vol. 4, pp. 12-49. (In Russ.)
2. Demidenko M. V., Kovach M., Korshunov D. A., Pelipas I. V., Tochitskaya I. E. Kolebaniya valyutnykh kursov v EAES v 2014-2015 godakh: analiz i rekomendatsii [Exchange Rate Fluctuations in the EAEU in 2014-2015: Analysis and Recommendations]. Doklad Tsentra integratsionnykh issledovaniy EBR [Report of the EBR Center for Integration Studies], 2017, no. 4. (In Russ.)
3. Elkina M. A. Finansovaya repressiya i effektivnost’ finansovogo rynka v modeli obshchego ravnovesiya [Financial Repression and Financial Market Efficiency in a General Equilibrium Model]. Ekonomicheskaya politika [Economic Policy], 2021, vol. 16, no. 3, pp. 44-81. (In Russ.)
4. Elkina M. A., Pekarski S. E. Makroekonomicheskie effekty finansovoy repressii v DSGEmodeli s finansovymi friktsiyami [Macroeconomic Effects of Financial Repression in a DSGE Model With Financial Friction]. Ekonomicheskiy zhurnal VShE [HSE Economic Journal], 2020, no. 4, pp. 475-502. (In Russ.)
5. Isakov K. S., Pekarski S. E. Otsenka vozdeystviya finansovoy repressii na dokhody byudzheta [Assessment of the impact of financial repression on budget revenues]. Ekonomicheskaya politika [Economic Policy], 2016, vol. 11, no. 5, pp. 28-49. (In Russ.)
6. Isakov K. S., Pekarski S. E. Effektivnost’ fiskal’nogo stimulirovaniya v usloviyakh finansovoy repressii [The Effectiveness of Fiscal Stimulation in the Conditions of Financial Repression]. Zhurnal ekonomicheskoy teorii [Journal of Economic Theory], 2017, no. 4, pp. 59-68. (In Russ.)
7. Karev M. G. Inflyatsiya, real’nyy obmennyy kurs i denezhnaya politika v ekonomike s ogranichennoy elastichnost’yu potoka kapitala po protsentnoy stavke [Inflation, Real Exchange Rate, and Monetary Policy in an Economy with Limited Interest Rate Elasticity of Capital Flow]. Ekonomicheskiy zhurnal VShE [HSE Economic Journal], 2009, no. 13, pp. 329-359. (In Russ.)
8. Norkina O. Finansovaya repressiya i populizm [Financial Repression and Populism]. Ekonomicheskaya politika [Economic Policy], 2018, vol. 13, no. 1, pp. 122-147. (In Russ.)
9. Polbin A. V. Postroenie dinamicheskoy stokhasticheskoy modeli obshchego ravnovesiya dlya ekonomiki s vysokoy zavisimost’yu ot eksporta nefti [Building a Dynamic Stochastic General Equilibrium Model for an Economy Highly Dependent on Oil Export]. Ekonomicheskiy zhurnal VShE [HSE Economic Journal], 2013, no. 2, pp. 323-359. (In Russ.)
10. Polbin A. V. Ekonometricheskaya otsenka strukturnoy makroekonomicheskoy modeli rossiyskoy ekonomiki [Econometric Assessment of a Structural Macroeconomic Model of the Russian Economy]. Prikladnaya ekonometrika [Applied Econometrics], 2014, no. 33(1), pp. 3-29. (In Russ.) 11. Allegret J.-P., Benkhodja M., Razafindrabe T. Monetary Policy, Oil Stabilization Fund and the Dutch Disease. GREDEG Working Papers, no. 06, 2018.
11. Brubakk L., Husebo T. A., Maih J., Olsen K., Ostnor M. Finding NEMO: Documentation of the Norwegian Economy Model. Staff Memo. Publications from Norges Bank, no. 2006/6, 2006.
12. Calice P., Kalan F. D., Masetti O. Interest Rate Repression: A New Database. World Bank, Policy Research Working Paper, no. 9457, 2020.
13. Desai R., Denizer C., Gueorguiev N. The Political Economy of Financial Repression in Transition Economies. World Bank Group Policy Research Working Paper, no. 2030, 1999. DOI:10.1596/1813-9450-2030.
14. Friedman M. A Monetary and Fiscal Framework for Economic Stability. American Economic Review, 1948, vol. 38, no. 3, pp. 245-264.
15. Gertler M., Karadi P. A Model of Unconventional Monetary Policy. Journal of Monetary Economics, 2011, vol. 58, pp. 17-34.
16. Heng D. Impact of the New Financial Services Law in Bolivia on Financial Stability and Inclusion. IMF Working Paper, WP/15/267, 2015.
17. Kydland F., Prescott E. C. Time to Build and Aggregate Fluctuations. Econometrica, 1982, vol. 50, no. 6, pp. 1345-1370.
18. Lama R., Medina J. P. Is Exchange Rate Stabilization an Appropriate Cure for the Dutch Disease? International Journal of Central Banking, 2012, vol. 8(1), pp. 5-46.
19. Leduc S., Sill K. A Quantitative Analysis of Oil-Price Shocks, Systematic Monetary Policy, and Downturns. Journal of Monetary Economics, 2004, vol. 51(4), pp. 781-808.
20. McKinnon R. I. Money and Capital in Economic Development. Washington, DC, Brookings Institution, 1973.
21. Medina J. P., Soto C. Oil Shocks and Monetary Policy in an Estimated DSGE Model for a Small Open Economy. Central Bank of Chile Working Papers, no. 353, 2005.
22. Medina J. P., Soto C. Copper Price, Fiscal Policy, and Business Cycle in Chile. Central Bank of Chile Working Papers, no. 458, 2007.
23. Merola R. The Role of Financial Frictions During the Crisis: An Estimated DSGE Model. Economic Modelling, 2015, vol. 48, pp. 70-82.
24. Morisset J. Does Financial Liberalization Really Improve Private Investment in Developing Countries? Journal of Development Economics, 1993, vol. 40, pp. 133-150.
25. Muscatelli A., Tirelli P., Trecroci C. The Interaction Between Fiscal and Monetary Policies: Some Evidence Using Structural Econometric Models. In: Money Macro and Finance (MMF) Research Group Conference. Colchester, 2003.
26. Reinhart C. M., Sbrancia M.B. The Liquidation of Government Debt. IMF Working Paper, WP/15/7, 2015.
27. Rotemberg J. Sticky Prices in the United States. Journal of Political Economy, 1982, vol. 90(6), pp. 1187-1211.
28. Roubini N., Sala-i-Martin X. Financial Repression and Economic Growth. Journal of Development Economics, 1992, vol. 39, pp. 5-30.
29. Roubini N., Sala-i-Martin X. A Growth Model of Inflation, Tax Evasion and Financial Repression. Journal of Monetary Economics, 1995, vol. 35(2), pp. 275-301.
30. Sargent T., Wallace N. Some Unpleasant Monetarist Arithmetic. Quarterly Review of Federal Reserve of Bank of Minneapolis, 1981, Fall, 531.
31. Sargent T. The Ends of Four Big Inflations. In: Inflation: Causes and Effects. NBER, 1982, pp. 41-98.
32. Safavian M., Zia B. The Impact of Interest Rate Caps on the Financial Sector: Evidence from Commercial Banks in Kenya. World Bank, Policy Research Working Paper, no. 8393, 2018.
33. Shaw E. Financial Deepening in Economic Development. New York, Oxford University Press, 1973.
34. Scheer A., Kriwoluzky A., Muller G. Financial Repression in General Equilibrium. In: VfS Annual Conference: Alternative Structures for Money and Banking. Vienna, 2017, 168301.
35. Smets F., Wouters R. An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area. National Bank of Belgium Working Paper, no. 2, 2003.
36. Smets F., Wouters R. Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach. American Economic Review, 2007, vol. 97, no. 3, pp. 586-606.
37. Woodford M. Price Level Determinacy Without Control of a Monetary Aggregate. NBER Working Paper, no. 5204, 1995.
38. Zoli E. How Does Fiscal Policy Affect Monetary Policy in Emerging Market Countries? BIS Working Papers, no. 174, 2005.
Review
For citations:
Pak Y.A., Pekarski S.E. Exogenous Shocks and Inflation Under Conditions of Financial Repression. Economic Policy. 2022;17(6):8-39. (In Russ.) https://doi.org/10.18288/1994-5124-2022-6-8-39
Views:
84
Email this article 