Financial Repression and Exchange Rate Management in developing countries : theory and empirical support from India

Restrictions on domestic and international financial transactions have enabled governments to generate revenues through financial repression while restraining inflation. The fiscal implications of these revenues, i.e. seignorage and implicit taxation of financial intermediation, pose a challenge for financial reform and liberalization. This paper presents a theoretical model that incorporates the role of financial repression in fiscal policy and exchange rate management under capital controls. It demonstrates how a balance of payments crisis arises under an exchange rate peg without capital account convertibility in the model economy and how financial repression may be used for exchange rate management