## Financial Repression and Exchange Rate Management in Developing Countries: Theory and Empirical Evidence for India

_IMF Working Papers, August 1, 2001_

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## Bibliographic details
- Authors: Renu Kohli, Kenneth Kletzer
- Published: August 1, 2001
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451852691.001

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### Summary
- Most developing countries have imposed restrictions on domestic and international financial transactions at one time or another.
- Such restrictions have allowed governments to generate significant proportions of their revenues from financial repression while restraining inflation.
- The eventual fiscal importance of the revenues from seignorage and from implicit taxation of financial intermediation pose a challenge for financial reform and liberalization.
- The paper presents a model of the role of financial repression in fiscal policy and exchange rate management under capital controls.
- The model is compared to the experience of India in the last two decades, with discussion of dynamics leading up to devaluation in 1991 and the role of financial repression in exchange rate intervention afterwards.

### Model and mechanisms
- Framework: role of financial repression in fiscal policy and exchange rate management under capital controls.
- Mechanisms analyzed:
  - Revenue generation through seignorage.
  - Implicit taxation of financial intermediation.
  - Use of financial repression instruments for exchange rate management.
- Balance of payments crisis:
  - The paper shows how a balance of payments crisis arises under an exchange rate peg without capital account convertibility in the model economy.

### Empirical comparison: India
- India is used as the empirical example that exemplifies the fiscal importance of financial restrictions.
- Historical focus:
  - Dynamics leading up to devaluation in 1991.
  - Role of financial repression in exchange rate intervention after 1991.

### Key findings and implications
- Financial repression can be a significant source of government revenue in developing countries.
- Revenues from seignorage and implicit taxation of financial intermediation can become fiscally important and complicate financial liberalization.
- Under a fixed exchange rate (peg) with limited capital account convertibility, the model identifies a path to balance of payments crises.
- Instruments of financial repression may be deployed to manage the exchange rate under capital controls, with implications for reform sequencing and policy design.

### Publication and metadata
- Authors: Renu Kohli, Kenneth Kletzer
- Date: August 1, 2001
- Series: Working Paper No. 2001/103
- Issue: 103
- Volume: 2001
- Pages: 42
- DOI: https://doi.org/10.5089/9781451852691.001
- Stock No: WPIEA1032001
- ISBN: 9781451852691
- ISSN: 1018-5941
- Subjects: Bank credit, Banking, Domestic credit, Exchange rates, External debt, Fiscal policy, Foreign exchange, Money, Public debt
- Keywords: balance of payments crises, commercial bank, current account, Domestic credit, exchange rate, exchange rate movement, exchange rate peg, exchange rates, Financial repression, Global, managed float, nominal rate, rate of depreciation, spot market, WP

*Renu Kohli and Kenneth Kletzer, "Financial Repression and Exchange Rate Management in Developing Countries: Theory and Empirical Evidence for India", IMF Working Papers 2001, 103 (2001), August 1, 2001.*

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