In a 2011 NBER working paper, Carmen Reinhart and Belen Sbrancia speculate on a possible return by governments to this form of debt reduction in order to deal with high debt levels following the 2008 economic crisis.[3] Reinhart and Sbrancia characterise financial repression as consisting of the following key elements:
- Explicit or indirect capping of interest rates, such as on government debt and deposit rates (e.g., Regulation Q).
- Government ownership or control of domestic banks and financial institutions with barriers that limit other institutions seeking to enter the market.
- High reserve requirements
- Creation or maintenance of a captive domestic market for government debt, achieved by requiring banks to hold government debt via capital requirements, or by prohibiting or disincentivising alternatives.
- Government restrictions on the transfer of assets abroad through the imposition of capital controls.
These measures allow governments to issue debt at lower interest rates. A low nominal interest rate can reduce debt servicing costs, while negative real interest rates erodes the real value of government debt.[3] Thus, financial repression is most successful in liquidating debts when accompanied by inflation and can be considered a form of taxation,[4] or alternatively a form of debasement.[5]
