Is financial repression a solution to reduce fiscal vulnerability? The example of France since the end of World War II

Abstract

This article contributes to the recent empirical literature on financial repression and focuses on the French case since the end of World War II. We find that the fiscal adjustment needed to lower the debt ratio has been smaller during the years of financial repression in comparison with those of liberalized financial markets. This was possible because the real interest rates were low. We conduct a counterfactual analysis to see whether the vulnerability of public finances would have been different, if, since the late 1980s, the governments had continued carrying out the same financial repression policies. We answer affirmatively showing that the cost of debt service would have been reduced.

Keywords:

• financial repression
• fiscal vulnerability
• France
• historical economics

JEL Classification:

• G28
• H63
• N20

Notes

¹ The data are collected from the International Financial Statistics (IFS) Database and from Dufrénot and Triki (2012).

² The latter is measured by applying a Hodrick-Prescott (HP) filter to the series of headline inflation.

³ Regressions were done with other transition variables, but are not reported here. They are available from request to the authors.

⁴ By definition, headline inflation has two components: expected and nonexpected inflation (which is called here ‘surprised inflation’). The aim of the estimated model is to show that what matters for changes in the ex-post real interest rate is the unexpected component (this is an important criticism addressed to the Reinhart’s paper by Taylor (2011), who explains that surprised inflation was used by governments to avoid that changes in inflation rates translate into nominal interest rate).

⁵ The value of z₀ is much lower than the sample mean of unexpected inflation μ = –0.004.

⁶ The sample mean of the central bank’s claim on government is μ = 8.385.