The theory of Financial Repression and its Application in Economies of Essay

The theory of Financial Repression and its natural covering in Economies of Different Countries - Essay ExampleThis essay describes the concept of monetary repression, and illust enjoin the mechanism of its action, exploitation the cases of different countries. The studies conducted by experts confirm that the restrictions imposed on the financial sectors of these two countries have indeed negatively impact on their respective economies giving credence to the McKinnon-Shaw hypothesis.Financial repression must have been fundamentally influenced by Keynesian economics as well as provoked by the instability of the early twentieth century events. Financial repression is underpinned by the theory that the state should intervene in financial matters to ensure lesser demand for money that should be channeled instead to the capital/labour sector.It was McKinnon and Shaw, who called attention of the world to the negative cause of such practices. Their hypothesis recommended the liberalisa tion of the financial sectors from such restrictions to stop stagnation and initiate economic growth.They insist that financial repression causes economic stagnation and that countries must therefore liberalise their financial sectors. This assertion is confirmed by other studies and models as well. Nonetheless, a number of cases exists that point to a contrary finding such as the cases of Korea and Malaysia that were twain placed under financial repression in the 1980s to avert financial collapse. This paper presented the cases of India and China, both of which are considered emerging global super economies, where the provisions of the theory proved to be accurate.... The existence of financial repression can be deduced from the presence of the following factors unsystematic distortions in financial prices such as arouse and exchange rates interest rates with ceiling caps and nominal interest at fixed rates, which slip by to low or even negative real interest rates spirited re serve proportions steer credit programmes, and ineffective credit rationing (Bhole 16). Gupta (2004), however, narrowed down the elements of financial repression into interest rate ceilings, high reserve requirements and compulsory credit allocation. The consequences of these intermediary measures are the implementation of high reserve and liquidity ratio for the purpose of easing budget deficits forcing banks to hold government bonds and money offstage bond and equity markets rest undeveloped because of the difficulty of getting government money from private securities, and government measures adopted to discourage private financial entities from competing with the public sector and to spur low-cost investment characterise the banking sector with interest rate caps (2). Financial repression is an economic tool usually employed by developing countries and was popular before the hold quarter of the 20th century. It was said to be a knee-jerk reaction to the events of the premiere half of that century. History shows that the first half of the 20th century was blighted by two financial catastrophic events the Wall lane Crash in 1929, and the Great Depression, which was instigated by the Crash. These two events were themselves thought to be two of the underpinning reasons for the outbreak of WWII. The lesson that these events brought was that expect economies were more stable and that the state can take the