Financial Repression and Exchange Rate Management in Developing Countries Theory and Empirical Evidence for India

Most developing countries have imposed restrictions on domestic and international financial transactions at one time or another. Such restrictions have allowed governments to generate significant proportions of their revenues from financial repression while restraining inflation. The eventual fiscal...

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Bibliographic Details
Main Author: Kohli, Renu
Other Authors: Kletzer, Kenneth
Format: eBook
Language:English
Published: Washington, D.C. International Monetary Fund 2001
Series:IMF Working Papers
Subjects:
Online Access:
Collection: International Monetary Fund - Collection details see MPG.ReNa
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245 0 0 |a Financial Repression and Exchange Rate Management in Developing Countries  |b Theory and Empirical Evidence for India  |c Renu Kohli, Kenneth Kletzer 
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300 |a 42 pages 
651 4 |a India 
653 |a Credit 
653 |a Public debt 
653 |a Banks 
653 |a Public finance & taxation 
653 |a Banks and banking 
653 |a Currency; Foreign exchange 
653 |a Debts, Public 
653 |a Fiscal Policy 
653 |a Open Economy Macroeconomics 
653 |a Exports and Imports 
653 |a Mortgages 
653 |a International Lending and Debt Problems 
653 |a External debt 
653 |a Money 
653 |a Foreign Exchange 
653 |a Macroeconomic Analyses of Economic Development 
653 |a Bank credit 
653 |a Macroeconomics 
653 |a Banking 
653 |a Foreign exchange 
653 |a Depository Institutions 
653 |a Monetary economics 
653 |a Debt Management 
653 |a Monetary Policy, Central Banking, and the Supply of Money and Credit: General 
653 |a Micro Finance Institutions 
653 |a Debt 
653 |a Fiscal policy 
653 |a International economics 
653 |a Debts, External 
653 |a Sovereign Debt 
653 |a Domestic credit 
653 |a Banks and Banking 
653 |a Exchange rates 
653 |a Public Finance 
653 |a Money and Monetary Policy 
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520 |a Most developing countries have imposed restrictions on domestic and international financial transactions at one time or another. Such restrictions have allowed governments to generate significant proportions of their revenues from financial repression while restraining inflation. The eventual fiscal importance of the revenues from seignorage and from implicit taxation of financial intermediation pose a challenge for financial reform and liberalization. This paper presents a model of the role of financial repression in fiscal policy and exchange rate management under capital controls. We show how a balance of payments crisis arises under an exchange rate peg without capital account convertibility in the model economy and how the instruments of financial repression may be used for exchange rate management. The model is compared to the experience of India, a country that exemplifies the fiscal importance of financial restrictions, in the last two decades. In particular, we discuss the dynamics leading up to devaluation in 1991 and the role of financial repression in exchange rate intervention afterwards