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Fiscal Rigidities, Public Debt, and Capital Flight

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  • Alain Ize

    (International Monetary Fund)

  • Guillermo Ortiz

    (International Monetary Fund)

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    Abstract

    This paper associates exchange rate crises and capital flight with the possibility of default on public debt resulting from fiscal rigidities. By including interest-bearing debt, both domestic and external, the model can generate the timing of an attack and can explain why domestic public bonds, even when perfectly indexed, cannot eliminate the possibility of a crisis. This fiscal framework provides explanations for the simultaneity of private capital flight and public foreign borrowing and wide observed fluctuations in real exchange rates, with recent Mexican experience as illustration.

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    Bibliographic Info

    Article provided by Palgrave Macmillan in its journal Staff Papers - International Monetary Fund.

    Volume (Year): 34 (1987)
    Issue (Month): 2 (June)
    Pages: 311-332

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    Handle: RePEc:pal:imfstp:v:34:y:1987:i:2:p:311-332

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    Cited by:
    1. Tabellini, Guido & Alesina, Alberto, 1989. "External Debt, Capital Flight and Political Risk," Scholarly Articles 4553019, Harvard University Department of Economics.
    2. van Wijnbergen, Sweder, 1991. "Should price reform proceed gradually or in a"big bang?"," Policy Research Working Paper Series 702, The World Bank.
    3. Hermes, Niels & Lensink, Robert & Murinde, Victor, 2002. "Flight Capital and its Reversal for Development Financing," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
    4. de Aghion, Beatriz Armendariz & de Hinestrosa, Patricia Armendariz, 1995. "Debt relief, growth and price stability in Mexico," Journal of Development Economics, Elsevier, vol. 48(1), pages 135-149, October.
    5. Graciela L. Kaminsky, 1998. "Currency and banking crises: the early warnings of distress," International Finance Discussion Papers 629, Board of Governors of the Federal Reserve System (U.S.).
    6. Fischer, Stanley, 1989. "The economics of the government budget constraint," Policy Research Working Paper Series 224, The World Bank.
    7. Bert Hofman & Helmut Reisen, 1990. "Debt Overhang, Liquidity Constraints and Adjustment Incentives," OECD Development Centre Working Papers 32, OECD Publishing.
    8. William C. Gruben, 1996. "Policy priorities and the Mexican exchange rate crisis," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q I, pages 19-29.
    9. William C. Gruben & Darryl McLeod, 1999. "Is foreign-currency indexed debt a commitment technology? Some evidence from Brazil and Mexico," Center for Latin America Working Papers 0299, Federal Reserve Bank of Dallas.
    10. Eliana Cardoso, 1991. "From Inertia to Megainflation: Brazil in the 1980s," NBER Working Papers 3585, National Bureau of Economic Research, Inc.

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