On the optimality of financial repression

V. V. Chari, Alessandro Dovis, Patrick J. Kehoe

Research output: Contribution to journalArticle

Abstract

When is financial repression—namely, policies that force banks to hold government debt—optimal? With commitment, such policies are never optimal because they crowd out banks’ productive investments. Without commitment, they are optimal when governments need to issue unusually large amounts of debt, such as during wartime. In such times, repression allows governments to credibly issue more debt. Repression increases credibility because when banks hold government debt, defaults dilute net worth, reduce investment, and are thus costly ex post. Forcing banks to hold debt endogenously increases these ex post costs but has ex ante costs because doing so crowds out investments.

Original languageEnglish (US)
Pages (from-to)710-739
Number of pages30
JournalJournal of Political Economy
Volume128
Issue number2
DOIs
StatePublished - Feb 1 2020

    Fingerprint

Cite this