Quantifying Financial Repression in Emerging Markets

Financial repression has historically accompanied periods of high fiscal needs. Yet there is no high-frequency measure of repression for emerging markets (EMs), where weaker institutions and lower debt tolerance make it especially prevalent. To that end, I examine the Domestic Bond Premium (DBP): the yield spread between EM local currency (LC) government bonds and AAA-rated supranational bonds in the same currency and tenor. Using data from 4,017 supranational bonds across 11 EM currencies, I document that the DBP is frequently negative and remains stable during periods of financial stress when government LC yield spreads over US Treasuries widen sharply. A simple portfolio choice model decomposes the DBP into default, liquidity, and financial repression components. The empirical evidence supports the model predictions by showing that default risk and liquidity alone cannot account for the low DBPs, pointing to repression as a key force bringing government borrowing costs below the supranational benchmarks.