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External debt, capital flight and political risk

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Author Info

  • Alesina, Alberto
  • Tabellini, Guido

Abstract

This paper explains the simultaneous occurrence of large external debts, private capital outflows and low domestic capital formation. We consider a general equilibrium model in which two government types with conflicting distributional goals randomly alternate in office. Uncertainty over the fiscal policies of future governments generates capital flight and small domestic investment, and induces the government to overaccumulate external debt. The model also predicts that left-wing governments are more inclined to restrict capital outflows than right-wing governments. Finally, we examine how political uncertainty affects the risk premium and how debt repudiation may occur after a regime change.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 27 (1989)
Issue (Month): 3-4 (November)
Pages: 199-220

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Handle: RePEc:eee:inecon:v:27:y:1989:i:3-4:p:199-220

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Web page: http://www.elsevier.com/locate/inca/505552

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References

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  1. Jonathan Eaton & Mark Gersovitz, 1987. "Country Risk and the Organization of International Capital Transfer," NBER Working Papers 2204, National Bureau of Economic Research, Inc.
  2. Rudiger Dornbusch, 1987. "Debt Problems and the World Macro Economy," NBER Working Papers 2379, National Bureau of Economic Research, Inc.
  3. Jeffrey Sachs & Daniel Cohen, 1982. "LDC Borrowing with Default Risk," NBER Working Papers 0925, National Bureau of Economic Research, Inc.
  4. Eaton, Jonathan, 1987. "Public Debt Guarantees and Private Capital Flight," World Bank Economic Review, World Bank Group, vol. 1(3), pages 377-95, May.
  5. Alesina, Alberto, 1988. "Credibility and Policy Convergence in a Two-Party System with Rational Voters," American Economic Review, American Economic Association, vol. 78(4), pages 796-805, September.
  6. Sebastian Edwards, 1988. "Structural Adjustment Policies in Highly Indebted Countries," NBER Working Papers 2502, National Bureau of Economic Research, Inc.
  7. Robert E. Cumby & Richard M. Levich, 1987. "On the Definition and Magnitude of Recent Capital Flight," NBER Working Papers 2275, National Bureau of Economic Research, Inc.
  8. Alberto Alesina, 1987. "A Positive Theory of Fiscal Deficits and Government Debt in a Democracy," UCLA Economics Working Papers 435, UCLA Department of Economics.
  9. Joshua Aizenman, 1987. "Investment, Openness, and Country Risk," NBER Working Papers 2410, National Bureau of Economic Research, Inc.
  10. Berg, Andrew & Sachs, Jeffrey, 1988. "The debt crisis structural explanations of country performance," Journal of Development Economics, Elsevier, vol. 29(3), pages 271-306, November.
  11. Rudiger Dornbusch & Juan Carlos de Pablo, 1987. "Argentina: Debt and Macroeconomic Instability," NBER Working Papers 2378, National Bureau of Economic Research, Inc.
  12. Herschel I. Grossman & John B. Van Huyck, 1985. "Sovereign Debt as a Contingent Claim: Excusable Default, Repudiation, and Reputation," NBER Working Papers 1673, National Bureau of Economic Research, Inc.
  13. Fischer, Stanley, 1980. "Dynamic inconsistency, cooperation and the benevolent dissembling government," Journal of Economic Dynamics and Control, Elsevier, vol. 2(1), pages 93-107, May.
  14. Rudiger Dornbusch, 1984. "External Debt, Budget Deficits and Disequilibrium Exchange Rates," NBER Working Papers 1336, National Bureau of Economic Research, Inc.
  15. Alain Ize & Guillermo Ortiz, 1987. "Fiscal Rigidities, Public Debt, and Capital Flight," IMF Staff Papers, Palgrave Macmillan, vol. 34(2), pages 311-332, June.
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