allocation of capital, high costs of financial intermediation, and lower rates of return to savers, it tends to reduce economic efficiency and growth.<sup>11</sup> Overall, the empirical findings on the effect of financial repression support this view, and various channels through which financial repression hinders growth have been evidenced. By pushing long‐term interest rates downward, central banks are keeping growing general government debt levels sustainable and are discouraging discipline in government finances— crowding out the private sector. Public sector expenditure by the government and state‐owned enterprises (SOEs) financed by money creation and capture undermined the efficiency of investment. With state‐controlled interest rates, economic agents are provided with misleading signals, which undermine the optimal allocation of capital. If financial repression reaches the point of undermining the innovation process by binding resources in less efficient investment projects and reducing the incentive for household savings, then investments, productivity gains, and economic development will slow. Furthermore, inflated central bank balance sheets, which contain growing amounts of government bonds, erode the credibility of central banks. Negative real interest rate policies inhibit financial deepening and could even lead to financial meltdowns, during which the exploding debts of financial institutions, especially state‐owned banks, are transformed into public debt to ensure financial stability. In the case of India, it was found that financial repression had a negative impact on financial depth, beyond and above the effects of the real rate of interest.<sup>12</sup> Capital controls are also financially repressive policy. Despite their virtues, the use of capital controls involves costs. Because of their uncompetitive nature, capital controls increase the cost of capital by creating financial autarky; limit both domestic and foreign investors’ ability to diversify portfolios; and help inefficient financial institutions survive.

From a more political economy perspective, financial repression may lead to growing economic inequality and policy opposition.<sup>13</sup> Unlike other taxes, the financial repression “tax” is determined by financial regulations and inflation performance that are largely opaque to the public and economic actors. Given that fiscal deficit reduction usually involves highly unpopular expenditure reductions and/or tax increases of one form or another, the relatively “stealthier” financial repression tax may be a more politically palatable alternative for authorities faced with the need to reduce outstanding debts. However, even if the impact of financial repression is opaque in the short‐term, it discretionarily creates winners and losers, with the latter likely to call for policy change in the long run. The causality between increasingly loose monetary conditions and political destabilization goes in both directions. First, preferential access to low interest rate credits benefits certain firms, sectors or regions to the detriment of others, thereby increasing the likelihood of political dissatisfaction. Second, the resulting loss of support for the established policy typically triggers additional redistribution efforts by the government, which aims to restore political stability. To finance the additional government expenditure, additional issuance of below market rate government securities becomes necessary, which initiates a new round of adverse redistribution effects of monetary expansion. Because growing political instability constitutes a severe

> 11 Roubini, N. and X. Sala‐i‐Martin (1992). Financial Repression and Economic Growth, Journal of Development Economics 39, p. 5 – 30.

> 12 Demetriades, Panicos and Kul B. Luintel (1997). The Direct Costs of Financial Repression: Evidence from India. The Review of Economics and Statistics, Vol. 79 No. 2, pp. 311‐320, The MIT Press.

> 13 Duarte, P., and Schnabl, G. (2017). Monetary Policy, Income Inequality and Political Instability. CESifo Working Paper 6734.

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