Financial Repression, Wellbeing and Financial Stability The African Perspective

Abstract

Amidst the rising sovereign debt levels and inflation crisis following COVID-19, governments around the world contemplated reintroducing financial repression which has significant economic implications. Although these implications have been empirically examined, there is still limited literature on the effect of the policy on wellbeing and financial stability. This study examines the impact of financial repression on human wellbeing and financial stability with data spanning 20002019 in ten African countries using dynamic panel framework estimated with GMM strategy. The study finds that financial repression weakly but significantly and directly impact wellbeing and financial stability, and the macroeconomic environment negligibly influences repression effect on wellbeing but significantly influences repression effect on financial stability. Except interest rate controls, repressive high bank reserve ratio is good, but should be at moderate level to improve financial stability and human wellbeing, and some level of inflation is necessary to optimize repression benefits. Using more of the financial repression (FR) policy toolkits as proxy for FR could have captured repression better, instead of employing interest rate control and bank reserve ratio only. This nonetheless, will not adversely affect the findings since most of the FR toolkits are interconnected, and a trigger of one can trigger the others.