Financial Repression and Laffer Curves
One of the key issues of optimal fiscal policy is public goods financing. Financial repression is commonly used by governments as an implicit taxation of financial sector along with explicit labor and capital taxes. In this paper we consider the optimal choice of benevolent government in an overlapping generations’ model with an endogenous labor supply and defined contribution pension system. Financial repression is modeled as an artificial increase in demand on government bonds of the pension fund with the reduced rate of return. The optimal choice depends on the population growth: when the growth is negative the government does not resort to the financial repression, and public good is financed by the labor tax revenues. When the population growth is positive optimal choice of the government includes financial repression coupled with capital tax. In this case the interest rate on the government debt is –1. Stronger financial repression leads to the decrease in pension savings, substituted by voluntary savings, which leads to higher capital and output per unit of labor.
Financial repression in the form of regulated expansion of demand for public bonds with below-market rate of return stabilizes public debt and decreases its service cost. This helps financing of fiscal stimuli programs in times of economic recession and high public sector indebtedness. But being implicit and distortionary taxation of households, financial repression interferes with market mechanisms and can decrease the effectiveness of fiscal stimulus. In this paper we augment the New Keynesian dynamic stochastic general equilibrium model with the elements of financial repression to evaluate the impact of financial repression on fiscal multipliers. We compare different regimes of finance of fiscal expansion and confirm that lump-sum taxation delivers the highest multiplier, while proportional labor income taxation leads to substantial distortions and decreases the effectiveness of fiscal stimulus. Most importantly, we show that tighter financial repression in the form of higher requirement for households to hold public debt only marginally decreases the fiscal multiplier. At the same time, tightening repression by decreasing the rate of return on public bonds leads to higher fiscal multiplier. This result is in line with the literature, which shows higher effectiveness of fiscal stimuli under zero lower bound in the money market. We also estimate the short- and the long-run impact of financial repression on public debt. Under substantial inflation inertia, positive monetary policy shock provides long lasting effect of the liquidation of public debt.
Modern financial repression in developed countries takes the form of various measures aimed at increasing the placement of public debt with a below-market or even negative real rate of return. It provides governments with an additional revenue or liquidates their debt. But financial repression is a hidden tax on wealth, which introduce additional distortions into the economy and thus affects the base of traditional taxes. In this paper we introduce financial repression into the neoclassical dynamic general equilibrium model to assess its overall impact on government revenues. Following the framework of Trabandt and Uhlig (2011) we estimate Laffer curves for USA and the set of European countries. We show, that tighter repression shifts Laffer curves for consumption and labor-income taxes down, but actually increases the revenue from capital-income taxation. As a result, and despite a decrease in output, financial repression leads to an increase in government purchases. We also estimate marginal rates of substitutions between different policy instruments and show, that while the U.S. economy cannot loosen repression without forgoing government purchases or increasing traditional taxes, European economies are on the wrong side of the Laffer hill for financial repression that allows decreasing public debt and increasing its rate of return.
The paper examines the structure, governance, and balance sheets of state-controlled banks in Russia, which accounted for over 55 percent of the total assets in the country's banking system in early 2012. The author offers a credible estimate of the size of the country's state banking sector by including banks that are indirectly owned by public organizations. Contrary to some predictions based on the theoretical literature on economic transition, he explains the relatively high profitability and efficiency of Russian state-controlled banks by pointing to their competitive position in such functions as acquisition and disposal of assets on behalf of the government. Also suggested in the paper is a different way of looking at market concentration in Russia (by consolidating the market shares of core state-controlled banks), which produces a picture of a more concentrated market than officially reported. Lastly, one of the author's interesting conclusions is that China provides a better benchmark than the formerly centrally planned economies of Central and Eastern Europe by which to assess the viability of state ownership of banks in Russia and to evaluate the country's banking sector.
The paper examines the principles for the supervision of financial conglomerates proposed by BCBS in the consultative document published in December 2011. Moreover, the article proposes a number of suggestions worked out by the authors within the HSE research team.