# **_B. Are IRCs Part of a Broader Financial Repression Policy Toolkit?_**

IRCs have been historically part of a wider financial repression policy toolkit. IRCs have often been one among many financial repression policies, including government ownership or control of banks, controls on cross-border capital flows, restrictions on entry in the banking market, and excessively high bank reserve requirements. To check whether interest rate repression is in fact more pervasive in countries which adopt other financial repression policies, we calculate the pairwise correlation coefficients between our measure of IRC bindingness for lending ceilings and the following proxies for financial repression policies:<sup>16,17</sup>

- **State ownership of banks** : Ownership of banks is the most direct form of control a government can have over credit allocation. State ownership can be the result of nationalization following a banking crisis (e.g., Mexico in 1982, Indonesia in 1998 or more recently many advanced economies in the context of the GFC) but more often is the result of a conscious policy decision by the authorities (e.g., in India beginning in 1969). We proxy this variable by the share of the banking system's assets controlled by the government, where control is defined when the government owns 50 percent or more equity. We use Anginer et al. (2019), which provides the latest figure for 2016.<sup>18</sup> We expect a negative association between our measure of interest rate repression and the share of state ownership of banks, that is the lower the gap between the legal limits and the actual interest rates, the higher should be state ownership of banks.

- **Capital account restrictions** : Restrictions on international financial transactions are often imposed to give the government greater control over the flow of credit within the economy, as well as greater control over the exchange rate. These restrictions can take various forms, from transactions taxes to outright restrictions on inflows and/or outflows. We measure the extent of capital account restrictions by the widely used Chinn-Ito index. This is an index measuring a country’s degree of capital account openness initially introduced by Chinn and Ito (2006) and updated frequently.<sup>19</sup> The index is based on the tabulation of restrictions on cross-border financial transactions reported in the IMF’s Annual Report on Exchange Arrangements and Exchange Restrictions. It is therefore a measure of _de jure_ restrictions. We take the latest available value of the series, which is available up to 2017. Given that higher values of the Chinn-Ito index imply greater capital account openness, we expect a positive association with our measure of interest rate repression.

- **Entry barriers** : To maintain control over credit allocation, governments may restrict the entry into the financial system of new domestic banks or of other potential competitors, for example foreign banks or non-bank financial institutions. Entry barriers may take several forms, including outright restrictions on foreign banks; bank activity restrictions; or excessively restrictive licensing requirements. We proxy entry barriers by an index of legal requirements needed to obtain a banking license. This indicator, first developed by Barth et al. (2001), can be calculated using data systematically collected by the World Bank as a

> 16 While an important financial repression measure used in many jurisdictions, we do not include lending quotas that, to the best of our knowledge, are not systematically tracked and cannot be meaningfully proxied by a quantitative variable.

> 17 We did not calculate correlation coefficients for deposit IRCs due to the low number of observations. There are only 9 countries with deposit rate ceilings, and while there are 25 countries with deposit rate floors, 8 of them are ECCU members and 8 economies are WAEMU members.

> 18 Available at <u>https://datacatalog.worldbank.org/dataset/bank-regulation-and-supervision-survey#tab2.</u>

> 19 Available at <u>http://web.pdx.edu/~ito/Chinn-Ito_website.htm.</u>

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