Financial Repression in Transition: Evidence from Ukraine

This paper provides a rationale for the relatively poor macroeconomic performance in the post-Soviet transition economies based upon the concept of financial repression. Policies undertaken to assist in financing government expenditures caused financial repression and financial fragmentation, to use the terms introduced by McKinnon (1973). After an introductory section, I introduce a theoretical model of real and financial sectors in transition. The dynamic path to equilibrium from transition is derived. It is shown to have a tendency toward output contraction and hyperinflation when government policies promote financial repression. In the third section this hypothesis is examined with macroeconomic data from Ukraine for the period 1992 2001. These data are consistent with the hypothesis, although other factors (e.g., recession in trading partners) are also shown to be important. JEL classification numbers: G28, O16, O23, P24 Thanks to participants at seminars at various universities in the US and Russia for comments and suggestions. Thanks to Jason Jones and Sergiy Peredriy for data collection and analysis. Any and all errors, of course, remain mine. Financial Repression in Transition: Evidence from Ukraine