Financial repression often hinders economic development, yet its drivers remain debated. This article argues that a country's fiscal imperative—prioritizing revenue collection over market efficiency—is usually the key factor behind such policies.

Context and Motivation

The study examines why some nations implement financial repression despite potential harm to growth. Existing theories focus on either market failures or political entrenchment but overlook the state's fiscal motivations.

New Fiscal Theory

By analyzing Mexico through instrumental variables in a dynamic panel model alongside qualitative insights, this research introduces an alternative framework suggesting governments deliberately restrict credit due to easier tax collection benefits.

Key Findings

Financial repression persists even when it disadvantages private actors because the fiscal gains outweigh transaction costs associated with market distortions. This explains why repressive policies remain widespread despite their inefficiency.

Implications for Political Science

The findings highlight how fiscal constraints shape economic policy and underscore that seemingly counterproductive financial regulations often serve budgetary needs rather than development goals.