Long Term Debt and the Political Support for a Monetary Union
AbstractThis paper examines the role of long term debt for the political support of a monetary union or, more generally, an inflation-reduction policy. The central idea is that the decision about membership in the union leads to a redistribution between debtors and creditors, if they are holding long term debt with a nominally fixed interest rate, as well as tax payers. For example, if joining the union means a decrease in the inflation rate, creditors should favor joining while debtors should be against it. A government of a high inflation country might strategically try to exploit this effect by selling more long term debt denominated in its own currency at a fixed nominal rate rather than a foreign currency such as the Dollar (or, almost equivalently, as floating-rate debt or rolled-over short-term debt) to its citizens. We show that the effect on political support is unclear. While the "creditor effect" of increasing the number of agents holding domestically denominated debt helps generating support for joining the union, the "tax effect" of having to raise more taxes in order to pay for the increased real debt payments after a successful monetary union works in the opposite way. The paper then studies a number of special cases and ramifications. The case of Italy is examined more closely. The paper argues that recent debt management policy in Italy is probable to have eroded the political support for actions aimed at enhancing EMU membership chances
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 1997-13.
Date of creation: 1997
Date of revision:
Contact details of provider:
Web page: http://center.uvt.nl
monetary integration; national debt; monetary policy; inflation;
Other versions of this item:
- Uhlig, Harald, 1997. "Long Term Debt and the Political Support of a Monetary Union," CEPR Discussion Papers 1603, C.E.P.R. Discussion Papers.
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
- E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
- G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
- H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Eijffinger, S.C.W. & Huizinga, H.P. & Lemmen, J.J.G., 1996.
"Short-Term and Long-Term Government Debt and Nonresident Interest Withholding Taxes,"
1996-88, Tilburg University, Center for Economic Research.
- Eijffinger, Sylvester C. W. & Huizinga, Harry P. & Lemmen, Jan J. G., 1998. "Short-term and long-term government debt and nonresident interest withholding taxes," Journal of Public Economics, Elsevier, vol. 68(3), pages 309-334, June.
- Harry P. Huizinga & Jan J.G. Lemmen & Sylvester C.W. Eijffinger, 1997. "Short-Term and Long-Term Government Debt and Nonresident Interest Withholding Taxes," FMG Discussion Papers dp275, Financial Markets Group.
- Eijffinger, S.C.W. & Huizinga, H.P. & Lemmen, J.J.G., 1998. "Short-term and long-term government debt and non resident interest witholding taxes," Open Access publications from Tilburg University urn:nbn:nl:ui:12-76575, Tilburg University.
- Bohn, Henning, 1991. "Time consistency of monetary policy in the open economy," Journal of International Economics, Elsevier, vol. 30(3-4), pages 249-266, May.
- Eijffinger, S-C-W & de Haan, J, 1996.
"The Political Economy of Central-Bank Independence,"
Princeton Studies in International Economics
19, International Economics Section, Departement of Economics Princeton University,.
- Eijffinger, S. & De Hann, J., 1995. "The Political Economy of Central Bank Independence," Papers 9587, Tilburg - Center for Economic Research.
- Beetsma, R.M.W.J. & Bovenberg, A.L., 1995.
"The Interaction of Fiscal and Monetary Policy in a Monetary Union: Balancing Credibility and Flexibility,"
DELTA Working Papers
95-24, DELTA (Ecole normale supérieure).
- Beetsma, R.M.W.J. & Bovenberg, A.L., 1995. "The interaction of fiscal and monetary policy in a monetary union: Balancing credibility and flexibility," Discussion Paper 1995-101, Tilburg University, Center for Economic Research.
- Beetsma,Roel M.W.J., 1996. "The Interaction of Fiscal and Monetary Policy in a Monetary Union: Balancing Credibility and Flexibility," Research Memorandum 005, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
- Lucas, Robert Jr. & Stokey, Nancy L., 1983.
"Optimal fiscal and monetary policy in an economy without capital,"
Journal of Monetary Economics,
Elsevier, vol. 12(1), pages 55-93.
- Robert E. Lucas Jr. & Nancy L. Stokey, 1982. "Optimal Fiscal and Monetary Policy in an Economy Without Capital," Discussion Papers 532, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Bohn, Henning, 1990.
"A positive theory of foreign currency debt,"
Journal of International Economics,
Elsevier, vol. 29(3-4), pages 273-292, November.
- Henning Bohn, . "A Positive Theory of Foreign Currency Debt," Rodney L. White Center for Financial Research Working Papers 19-88, Wharton School Rodney L. White Center for Financial Research.
- Feldstein, Martin & Horioka, Charles, 1980.
"Domestic Saving and International Capital Flows,"
Royal Economic Society, vol. 90(358), pages 314-29, June.
- Alex Cukierman & Sebastian Edwards & Guido Tabellini, 1989.
"Seigniorage and Political Instability,"
NBER Working Papers
3199, National Bureau of Economic Research, Inc.
- Milesi-Ferretti, Gian Maria, 1995. "The Disadvantage of Tying Their Hands: On the Political Economy of Policy Commitments," Economic Journal, Royal Economic Society, vol. 105(433), pages 1381-1402, November.
- G Milesi-Feretti, 1991.
"Do Good or Do Well? Public Debt Management in a Two-Party Economy,"
CEP Discussion Papers
dp0053, Centre for Economic Performance, LSE.
- Gian Maria Milesi-Ferretti, 1995. "Do Good Or Do Well? Public Debt Management In A Two-Party Economy," Economics and Politics, Wiley Blackwell, vol. 7(1), pages 59-78, 03.
- Martin Feldstein & Philippe Bacchetta, 1991.
"National Saving and International Investment,"
in: National Saving and Economic Performance, pages 201-226
National Bureau of Economic Research, Inc.
- International Monetary Fund, 1995. "The Role of Foreign Currency Debt in Public Debt Management," IMF Working Papers 95/21, International Monetary Fund.
- Beetsma, Roel M. W. J. & Bovenberg, A. Lans, 1997.
"Central bank independence and public debt policy,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 21(4-5), pages 873-894, May.
- Jeromin Zettelmeyer, 1996. "EMU and Long Interest Rates in Germany," IMF Working Papers 96/133, International Monetary Fund.
- Alberto Giovannini, 1996. "The Debate on Money in Europe," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262071681, December.
- Alessandro Missale & Olivier Jean Blanchard, 1991.
"The Debt Burden and Debt Maturity,"
NBER Working Papers
3944, National Bureau of Economic Research, Inc.
- Uhlig, H.F.H.V.S. & Beetsma, R.M.W.J., 1997.
"An Analysis of the Stability Pact,"
1997-59, Tilburg University, Center for Economic Research.
- Fidrmuc, Jan & Horvath, Julius & Fidrmuc, Jarko, 1999.
"Stability of Monetary Unions: Lessons from the Break-up of Czechoslovakia,"
Transition Economics Series
10, Institute for Advanced Studies.
- Fidrmuc, J. & Horváth, J., 1998. "Stability of Monetary Unions: Lessons from the Break-Up of Czechoslovakia," Discussion Paper 1998-74, Tilburg University, Center for Economic Research.
- Fidrmuc, Jan & Horvath, Julius & Fidrmuc, Jarko, 1999. "Stability of monetary unions: Lessons from the break-up of Czechoslovakia," ZEI Working Papers B 17-1999, ZEI - Center for European Integration Studies, University of Bonn.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Richard Broekman).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.