Optimal Financial Repression

Financial repression is an unconventional and one of the most effective ways of dealing with significant levels of government debt. For many years such policies have been actively used be developed and developing countries. There are even strong arguments that advanced European economies introduced such policies after the Global Financial Crisis. The earnings from financial repression are beneficial for the government, but since they have an impact on the economy, they lead to distortions in the economy. This study investigates the optimal choice for the non-benevolent government that faces two policies: introduction of financial repression on domestic banks and taxes on households. There has been significant research on the financial repression and its effects in developing countries, where measures of this restrictive policy often include introduction of caps on the interest rates and high reserve requirements. However, the estimation of the financial repression policies in advanced economies, where the obligatory holdings of government debt by banks are more well-spread, is not as well-investigated. Hence, this study will contribute to the existing literature on financial repression by providing a new outlook on the financial.