From Financial Repression to External Distress: The Case of Venezuela |
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| Authors: | Carmen M Reinhart Miguel Angel Santos |
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| Institution: | 1. Kennedy School of Government, Harvard University, Cambridge, Massachusetts, USA;2. Center for International Development, Harvard University, Cambridge, Massachusetts, USA and Center of Finance, Instituto de Estudios Superiores en Administracion (IESA) |
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| Abstract: | Recent work suggests a connection between domestic debt and external default. We examine potential linkages for Venezuela, where the evidence reveals a nexus among domestic debt, financial repression, and external vulnerability. The financial repression tax (as a share of GDP) is similar to OECD economies, in spite of higher debt ratios in the latter. The financial repression “tax rate” is higher in years of exchange controls and legislated interest rate ceilings. We 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 Venezuela. |
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| Keywords: | capital flight capital and exchange controls default domestic debt external debt financial repression inflation interest rates |
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