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Do Good Or Do Well? Public Debt Management In A Two-Party Economy

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  • Gian Maria Milesi-Ferretti

Abstract

Governments facing elections may strategically manipulate policy instruments in order to increase their re-election chances. The incentives for strategic manipulation are studied in the context of a debt management model, in which two parties with different inflation aversion compete in elections. It is shown that the inflation-averse party may issue nominal debt in order to make its opponent "look bad" to voters, thus getting closer to the median voter. Nominal debt artificially enlarges the ex-post inflation tax base, causing higher inflation. Conversely, an inflation-prone government may issue indexed debt in order to reduce inflation incentives. Copyright 1995 Blackwell Publishers Ltd..

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Economics & Politics.

Volume (Year): 7 (1995)
Issue (Month): 1 (03)
Pages: 59-78

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Handle: RePEc:bla:ecopol:v:7:y:1995:i:1:p:59-78

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Cited by:
  1. Uhlig, Harald, 1997. "Long Term Debt and the Political Support of a Monetary Union," CEPR Discussion Papers 1603, C.E.P.R. Discussion Papers.
  2. Hagen, Rune Jansen & Torsvik, Gaute, 2008. "Irreversible investments, dynamic inconsistency and policy convergence," Working Papers in Economics 02/07, University of Bergen, Department of Economics.
  3. Nuno Ribeiro & Susana Jorge & Mercedes Cervera, 2013. "Estudo do Endividamento da Administração Local Portuguesa: Evidência Empírica USando Modelos de Análise de Dados em Painel," Notas Económicas, Faculdade de Economia, Universidade de Coimbra, issue 38, pages 46-67, December.
  4. Caselli, Francesco, 1997. "On the distribution of debt and taxes," Journal of Public Economics, Elsevier, vol. 65(3), pages 367-386, September.
  5. Leopoldo Fergusson & James A. Robinson & Ragnar Torvik & Juan F. Vargas, 2012. "The Need for Enemies," NBER Working Papers 18313, National Bureau of Economic Research, Inc.
  6. Hagen, Rune Jansen, 2002. "The electoral politics of public sector institutional reform," European Journal of Political Economy, Elsevier, vol. 18(3), pages 449-473, September.
  7. Jonsson, Gunnar, 1997. "Monetary politics and unemployment persistence," Journal of Monetary Economics, Elsevier, vol. 39(2), pages 303-325, July.
  8. Javier Salinas, 1998. "The Constitutional Political Economy of Public Deficits: The Spanish Case 1," Constitutional Political Economy, Springer, vol. 9(3), pages 235-249, September.

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