From Financial Repression to External Distress: The Case of Venezuela

49 Pages Posted: 27 Jul 2015 Last revised: 17 Apr 2022

See all articles by Carmen Reinhart

Carmen Reinhart

Harvard University - Center for Business and Government; Centre for Economic Policy Research (CEPR); World Bank; University of Maryland - School of Public Affairs; National Bureau of Economic Research (NBER); International Monetary Fund (IMF); Peterson Institute for International Economics; Harvard University, Harvard Kennedy School (HKS), Belfer Center for Science and International Affairs (BCSIA) ; Harvard University - Harvard Kennedy School (HKS)

Miguel Santos

Harvard University - Harvard Kennedy School (HKS)

Multiple version iconThere are 2 versions of this paper

Date Written: July 2015

Abstract

Recent work has supported that there is a connection between the level of domestic debt level and sovereign default on external debt. We examine the potential linkages in a case study of Venezuela from 1984 to 2013. This unique example encompasses multiple financial crises, cycles of liberalization and policy reversals, and alternative exchange rate arrangements. This experience reveals a nexus among domestic debt, financial repression, and external vulnerability. Unlike foreign currency-denominated debt, debt in domestic currency may be reduced through financial repression, a tax on bondholders and savers producing negative real interest rates. Using a variety of methodologies, we estimate the magnitude of the tax from financial repression. On average, this financial repression tax (as a share of GDP) is similar to those of OECD economies, in spite of the much higher domestic debt-to-GDP ratios in the latter. However, the financial repression “tax rate” is significantly higher in years of exchange controls and legislated interest rate ceilings. In line with earlier literature on capital controls, our comprehensive measures of capital flight document a link between domestic disequilibrium and a weakening of the net foreign asset position via private capital flight. We suggest these findings are not unique to the Venezuelan case.

Suggested Citation

Reinhart, Carmen and Reinhart, Carmen and Reinhart, Carmen and Reinhart, Carmen and Reinhart, Carmen and Reinhart, Carmen and Reinhart, Carmen and Reinhart, Carmen and Santos, Miguel, From Financial Repression to External Distress: The Case of Venezuela (July 2015). NBER Working Paper No. w21333, Available at SSRN: https://ssrn.com/abstract=2636105

Carmen Reinhart (Contact Author)

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Miguel Santos

Harvard University - Harvard Kennedy School (HKS) ( email )

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Cambridge, MA 02138
United States

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