China Economic Research Center Working Paper Series
No 2011-19:
FINANCIAL REPRESSION AND STRUCTURAL IMBALANCES
Anders C. Johansson ()
and Xun Wang ()
Abstract: This paper analyzes the relationship between financial
repression and structural change. We present a simple theoretical model of
structural transformation in which the impact of financial repression on
unbalanced growth is studied. Governments may choose to repress the
financial sector to allow for the development of the industry sector while
inhibiting growth in the domestic service sector. When investigating the
predictions of our model using data for a panel of countries, we find that
financial repression have a significant negative effect on structural
transformation. In countries with higher levels of financial repression,
the industry sector is developed rapidly while the service sector is held
back. The results are robust to different country sample compositions,
alternative measures of sectoral structure, and different measures of
financial repression. The analysis suggests that financial repression is an
important driver of structural imbalances, especially in countries with
heavy state intervention and where the government strongly favors
industrial expansion. Our findings have policy implications for governments
that are experiencing rapid economic transformation and that are using
financial repression to achieve a long-run industrial output growth.
Keywords: Financial repression; Structural change; Structural transformation; Economic development; (follow links to similar papers)
JEL-Codes: G18; L52; O16; O40; (follow links to similar papers)
39 pages, December 20, 2011
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