Financial Repression is Negatively Related to Financial Growth

1458 WordsFeb 26, 20186 Pages
Reports by Fry (1997) suggests that measuring financial distortions with black market exchange premiums rates and real interest rates squared lowers investment ratios eventually leading to a reduction in growth output. In the same vein, Roubini and Sala-i-Martin (1992) also revealed that financial repression is negatively related to growth while controlling other growth determinants; hence interest rates (bank-reserve requirements) correlates inversely with growth. In the work of Taylor A. M. (1998), he examined the effects of costs of financial distortions on long-term growth as well as structural differences in Latin America in the post war era (1930 to 1950). He found out that financial distortions had intense effects on economic performance. Taylor illustrated that financial repression prevented the existence of favorable accumulation trends in the region. He attributed Latin America’s failure to attain expeditious capital deepening to unfavorable and distorting policies, which consistently lead to retarded growth. Years of research accumulated empirical research by Edwards S. recapitulated that Latin America’s slow growth can be attributed costly development strategies. Conventional financial repression theories right from its inception by Shaw (1973) and McKinnon (1973) have always claimed that both credit and interest rates controls are detrimental to economic performance. For instance Fry (1978), Shaw (1973), Kapur (1976) and Matheison (1980) all argued that
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