Financial Repression and Populist Government in a Calibrated General Equilibrium Model

Modern financial repression takes the form of non-market placement of public debt with a rate of return below the market rate. As financial repression gives the populist government the opportunity to finance more government spending and to maintain a certain level of public deficit in long time period, financial repression becomes a convenient fiscal policy for that type of government. This paper analyzes financial repression in case of fiscal and monetary policy of the populist government. The government impose a requirement for households to hold a certain amount of public debt relatively to its asset amount with a below-market rate of return that distorts optimal household allocation, equilibrium on the financial market and negatively affects the total output at steady state. This paper uses a calibrated general equilibrium model to evaluate the fiscal and monetary policies of populist government, the optimal levels of financial repression instruments as well as the impact of financial repression in the form of non-market placement of public debt on overall output, government spending and, finally, household’s welfare. We find that when the degree of populism increases, the government tightens financial repression and uses financial repression instruments as complements. More severe financial repression leads to an increase in budget revenues and, consequently, to an increase of the level of government spending, but it displaces overall output and reduces the household’s welfare. At the same time, when changing taxation, the policy of financial repression is more optimal for a populist government.