In the book This Time Is Different, by Reinhart and Rogoff, in chapter 8, the authors state that

  • Higher minimum level of reserves (?)
  • And/or upper bound/ceiling to interest rates ( will help increase real inflation rate... however, isn't the nominal rate that which matters most for defaults?)

coupled with surges in inflation were, at certain historical moments, used to default on sovereign debt.

I understand how inflation can be used to 'default' on debt, but I'm not getting how the financial measures stated above would help...


After reading a few more chapters, the authors in their, by now very known, terse and often imprecise style, state that a financial repression is a method used by some governments to obtain indirectly more revenue.

This channel works when the government makes bank accounts as the main possible saving tool available to the common folk. Afterwards, the banks are obliged to acquire government debt, which often comes in form of higher minimum level of reserves (They don't explain how... but, maybe gvt debt may count as reserves, since the Central Bank may act as a 'printing money factory' of the government).

Nominal interest rates are those which usually direct the interest rate that the market asks for holding government debt. By keeping it artificially at a lower level, national investors/savers will have to abide by that low interest rate. Futhermore, by making inflation surge, the real burden of government debt will decrease as time goes by (assuming there's no way to circumvent national regulators/markets, legally or illegally).


Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.