Researcher
Alex Weigel.

Faculty Advisor
(Professor Zhenyu Cui)

Overview

The paper studies the macrofiscal consequences if the United States were to implement financial repression, such as interest rate controls and captive domestic debt markets, using OGUSA, a dynamic overlapping generations general equilibrium model. The analysis sets up a calibrated baseline US economy and then runs a multiyear reform scenario that turns on repression levers and later phases them out.

Key Findings

1. Policy Context & Motivation

  • Financial repression instruments include capital controls and interest-rate ceilings; historically they channeled savings to governments and limited capital flight.
  • The study asks: what happens if a major economy (the U.S.) deploys such tools today? It frames this against post-1990s global monetary dynamics and large official foreign purchases of U.S. Treasuries.

2. Model & Equilibrium Setup

  • Capital market: household saving supplies loanable funds; firms and government demand funds; net foreign flows close the gap.
  • Equilibrium: compute steady state and a transition path (illustratively T=40 annual periods) from baseline to new steady state after the policy shock.

3. Calibration (Baseline U.S. Economy)

  • Demographics are taken from the Census and the Social Security Administration. Preferences feature a Frisch elasticity of labor supply of roughly two-fifths and a constant-relative-risk-aversion coefficient of about one and a half. The production technology uses a capital share in the mid-thirties percentage range, a depreciation rate of roughly five percent per year, and trend total factor productivity growth of around one and a half percent annually.
  • Tax system is estimated from Internal Revenue Service microdata, and government spending shares and debt targets are aligned with United States data. The open-economy specification includes foreign debt shares and a world interest rate of about four percent, with the model starting from the calendar year 2025.

4. Policy Levers & Experiment Design

  • Financial repression is implemented through interest-rate manipulation for government borrowing together with a captive-market lever that operates through the foreign share of new government debt. This lever is switched on for about seven years and then phased out, while all other tax and spending rules are held fixed.
  • Key foreign-exposure parameters include a debt-exposure coefficient a little above three-tenths and a capital-exposure coefficient somewhat below one-half.
  • Expectations are modeled as perfect foresight once the policy path has been announced.

5. Firms, Prices, and Income

  • A representative firm operates a Cobb–Douglas production technology, and factor prices equal the marginal products of capital and labor net of depreciation, so the real interest rate equals the marginal product of capital minus depreciation and the real wage equals the marginal product of labor.

6. Results Framing

  • Results are reported by comparing Reform vs Baseline macro paths (growth, rates, fiscal variables) within OG-USA. (Tables/figures referenced in the PDF section “IV: Simulation Results”.)

Conclusion and Future Work

  • The calibrated OG-USA environment provides a quantitative way to assess repression policies in today’s U.S. context, with a realistic tax system via Tax-Calculator. Future work can expand parameter sweeps (e.g., larger ζ D​ shifts, alternative phase-outs) and incorporate stochastic shocks.

Significance

  • Connects the historical practice of financial repression to a modern, open-economy OLG model, linking capital-control narratives and foreign official buying to macro-fiscal outcomes for the U.S. (context drawn from the paper’s background and cited literature).