M. Belén Sbrancia

University of Maryland
College Park, MD 20742

Graduate Program:

Undergraduate Program:

Working Papers

"Debt and Inflation during a Period of Financial Repression"

[Job market paper]

The current debt-to-GDP ratios of many advanced economies are at historical high levels, raising questions about how they are going to be reduced. I assess whether domestic debt can be inflated away by looking at the experience of 12 countries after the end of World War II, when debt levels were also high. The countries in the sample are mainly advanced economies with histories of relatively low inflation. I find that inflation played an important role in reducing government debt, generating revenues for the government that were, on average, between two and three percent of GDP. The incidence of the effect is primarily explained by the presence of financial repression keeping interest rates at low levels, rather than unanticipated inflation or changes in the market value of debt. I also examine how financial repression affected the relative returns on financial assets over this period. The results suggest that some of the equity premium during this period, which was over eight percent, can be explained by the abnormally low returns in the market for government bonds.


"The Liquidation of Government Debt" [with Carmen M. Reinhart]

NBER Working Paper 16893

Historically, periods of high indebtedness have been associated with a rising incidence of default or restructuring of public and private debts. A subtle type of debt restructuring takes the form of “financial repression.” Financial repression includes directed lending to government by captive domestic audiences (such as pension funds), explicit or implicit caps on interest rates, regulation of cross-border capital movements, and (generally) a tighter connection between government and banks. In the heavily regulated financial markets of the Bretton Woods system, several restrictions facilitated a sharp and rapid reduction in public debt/GDP ratios from the late 1940s to the 1970s. Low nominal interest rates help reduce debt servicing costs while a high incidence of negative real interest rates liquidates or erodes the real of government debt. Thus, financial repression is most successful in liquidating debts when accompanied by a steady dose of inflation. Inflation need not take market participants entirely by surprise and, in effect, it need not be very high (by historic standards). For the advanced economies in our sample, real interest rates were negative roughly half of the time during 1945-1980. For the United States and the United Kingdom our estimates of the average annual liquidation of debt via negative real interest rates amounted 2-3% of GDP a year. We describe some of regulatory measures and policy actions that characterized the heyday of the financial repression era.


Featured in: The Economist, Financial Times, The Wall Street Journal

Invited Publications

"Financial Repression Redux" [with Carmen M. Reinhart and Jacob Kierkegaard]

Finance & Development, Vol 48 No2 June 2011