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11 25 2015 | by Victor Xing | Capital Markets

Why doesn’t financial repression lead to asset outflows?

Investors do have the option to flee to other financial markets with higher interest rates to escape financial repression.  However, there are a number of factors to consider:

  1. Financial repression is a global phenomena across developed economies.  Below is a chart from BIS article: Global financial markets remain dependent on central banks, showing financial repression in multiple developed economies
    Financial repression is a global phenomena
    Financial repression is a global phenomena
  2. Interest rate differential is offset by currency risk.  In other words, currency exchange rate is a large factor behind the spread between different interest rates.  Investors moving funds abroad (to an economy with higher interest rates) would likely run into inflation risk (currency depreciation).  If investors decide to hedge out currency risk, then much of the gains from the higher interest rate would be nullified.
  3. Moving funds abroad or invest in foreign assets often raise an investor’s risk exposure, since many investors have less understanding on foreign economic conditions and monetary policies (which is a big driver in the currency market) compared to their country of domicile

Next article11 24 2015 | by Victor Xing | Central Banks

Should the Fed raise interest rates in December?