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External Debt, Capital Flight and Political Risk

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Author Info
Alesina, Alberto F
Tabellini, Guido

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Abstract

This paper provides an explanation of the simultaneous occurrence in developing countries of a large accumulation of external debt, private capital outflows and relatively low domestic capital formation. We consider a general equilibrium model in which two types of government with conflicting distributional goals randomly alternate in office. Uncertainty over the fiscal policies of future governments generates private capital flight and reduced domestic investment. This political uncertainty also provides the incentives for the current government to over-accumulate external debt. The model also predicts that left-wing governments are more inclined to impose restrictions on capital outflows than right-wing governments. Finally, we examine how political uncertainty affects the risk premium charged by lenders and how debt repudiation may occur after a change of political regime.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 253.

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Date of creation: Aug 1988
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Handle: RePEc:cpr:ceprdp:253

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Related research
Keywords: Capital Controls; Capital Flight; Debt Repudiation; Developing Countries; External Debt; Fiscal Policy; Political Economy;

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References listed on IDEAS
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  1. Eaton, Jonathan, 1987. "Public Debt Guarantees and Private Capital Flight," World Bank Economic Review, Oxford University Press, vol. 1(3), pages 377-95, May.
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  2. Alberto Alesina, 1987. "A Positive Theory of Fiscal Deficits and Government Debt in a Democracy," UCLA Economics Working Papers 435, UCLA Department of Economics. [Downloadable!]
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  3. Jeffrey Sachs & Daniel Cohen, 1982. "LDC Borrowing with Default Risk," NBER Working Papers 0925, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Andrew Berg & Jeffrey Sachs, 1988. "The Debt Crisis: Structural Explanations of Country Performance," NBER Working Papers 2607, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. 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. [Downloadable!] (restricted)
  6. Grossman, Herschel I & Van Huyck, John B, 1988. "Sovereign Debt as a Contingent Claim: Excusable Default, Repudiation, and Reputation," American Economic Review, American Economic Association, vol. 78(5), pages 1088-97, December. [Downloadable!] (restricted)
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  7. Sebastian Edwards, 1987. "Structural Adjustment Policies in Highly Indebted Countries," UCLA Economics Working Papers 453, UCLA Department of Economics. [Downloadable!]
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  8. Joshua Aizenman, 1990. "Investment, Openness, and Country Risk," NBER Working Papers 2410, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. 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.
  10. Jonathan Eaton & Mark Gersovitz, 1987. "Country Risk and the Organization of International Capital Transfer," NBER Working Papers 2204, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  11. R. Dornbusch, 1984. "External Debt, Budget Deficits and Disequilibrium Exchange Rates," Working papers 347, Massachusetts Institute of Technology (MIT), Department of Economics.
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