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Elections, Capital Flows, and Politico-economic Equilibria

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  • Roberto Chang

Abstract

We study an open economy where a pro-labor and a pro-business candidate compete in an election. The winner chooses taxes, which affect investment returns. Electoral outcomes depend on the size of the foreign debt, but the debt itself reflects expectations about the election. The resulting interaction is novel and has several implications. Elections are associated with increased volatility. Politico-economic crises can occur. Inefficiencies vanish if the candidates commit to an appropriate tax policy, but such commitments have predictable effects on the election. Empirical evidence supporting the theory is discussed. (JEL D72, F34, O17, O19)

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 100 (2010)
Issue (Month): 4 (September)
Pages: 1759-77

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Handle: RePEc:aea:aecrev:v:100:y:2010:i:4:p:1759-77

Note: DOI: 10.1257/aer.100.4.1759
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  1. Martin Uribe & Vivian Yue, 2004. "Country spreads and emerging countries: who drives whom?," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue Jun.
  2. Bussiere, Matthieu & Mulder, Christian, 2000. "Political Instability and Economic Vulnerability," International Journal of Finance & Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 5(4), pages 309-30, October.
  3. Paul M Vaaler & Burkhard N Schrage & Steven A Block, 2005. "Counting the investor vote: political business cycle effects on sovereign bond spreads in developing countries," Journal of International Business Studies, Palgrave Macmillan, vol. 36(1), pages 62-88, January.
  4. Acemoglu, Daron & Johnson, Simon & Robinson, James & Thaicharoen, Yunyong, 2003. "Institutional causes, macroeconomic symptoms: volatility, crises and growth," Journal of Monetary Economics, Elsevier, Elsevier, vol. 50(1), pages 49-123, January.
  5. Tillmann, Peter, 2004. "External shocks and the non-linear dynamics of Brady bond spreads in a regime-switching VAR," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 14(5), pages 439-454, December.
  6. Martínez, Juan & Santiso, Javier, 2003. "Financial Markets and Politics: The Confidence Game in Latin American Emerging Economies," MPRA Paper 12909, University Library of Munich, Germany.
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Cited by:
  1. Cáceres, Neila & Malone, Samuel W., 2013. "Forecasting leadership transitions around the world," International Journal of Forecasting, Elsevier, Elsevier, vol. 29(4), pages 575-591.

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