The Prerequisites for Financial Repression and Financial Liberalization Policy

Abstract

This paper examines theoretically the effect of financial policies on economic growth for four selected developing countries.  At the end of 1970s and in the beginning of 1980s these countries embarked on financial reform for a stability and growth purpose.This theoretical study suggests that both financial repression and financial liberalization policies provide the expected growth but it is subject to certain requirements. As a prerequisite, financial liberalization needs macroeconomic stability, institutions, political stability and, better supervision and regulation of the sector. And then after exercising liberalization increases efficiency of the sector. While financial repression needs benevolent dictator government, which is free from corruption and bribery and ultimately servant of the population. The lower real interest rate environment because of financial repression is the big opportunity to increase investment and economic growth. Otherwise, adopting both policies without fulfilling requirements provides instability and lower growth.

Keywords: financial repression, financial liberalization, economic growth