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Public Finance under Political Instability and Debt Conditionality

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  • Bohn, Frank

    (University of Essex)

Abstract

This paper presents an intertemporal political economy model of sustainable public finance relevant for many developing or transition countries: instability is inherent to the political structure and foreign debt is a crucial source of government revenue.The main results are: First, political instability causes myopic government behaviour as it induces higher debt levels, but it does not lead to an increase in inflation taxation as in Cukierman, et al. (1992). Second, debt conditionality aiming at monetary stability is particularly effective in heterogeneous societies with unstable governments. Third, it is shown that IMF policies requiring debtor countries to achieve both monetary and fiscal stability are suboptimal.

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Bibliographic Info

Paper provided by Royal Economic Society in its series Royal Economic Society Annual Conference 2003 with number 25.

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Date of creation: 04 Jun 2003
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Handle: RePEc:ecj:ac2003:25

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Keywords: monetary and fiscal stability; political economy; IMF conditionality; government revenue; debt ceiling; public investment;

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  1. Christian Schultz, 1998. "Monetary Policy, Delegation and Polarization," Discussion Papers 98-17, University of Copenhagen. Department of Economics.
  2. Tabellini, Guido & Alesina, Alberto, 1989. "External Debt, Capital Flight and Political Risk," Scholarly Articles 4553019, Harvard University Department of Economics.
  3. Schultz, Christian, 2002. "Policy biases with voters' uncertainty about the economy and the government," European Economic Review, Elsevier, vol. 46(3), pages 487-506, March.
  4. Cavalcanti Ferreira, Pedro, 1999. "Inflationary financing of public investment and economic growth," Journal of Economic Dynamics and Control, Elsevier, vol. 23(4), pages 539-563, February.
  5. Tabellini, Guido & Alesina, Alberto, 1990. "Voting on the Budget Deficit," Scholarly Articles 4553030, Harvard University Department of Economics.
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Cited by:
  1. Aviral Tiwari, 2013. "Taxation, Economic Growth and Political Stability," Transition Studies Review, Springer, vol. 20(1), pages 49-61, April.
  2. Fernando, Estrada & Mihai, Mutascu & Aviral Kumar, Tiwari, 2013. "Estabilidad política y tributación
    [Taxation and political stability]
    ," MPRA Paper 45226, University Library of Munich, Germany.
  3. Zhang, Yuewen, 2010. "Sovereign Risk Management in Recession: The Cases of Sweden and China," MPRA Paper 23364, University Library of Munich, Germany.
  4. Mutascu, Mihai & Tiwari, Aviral & Estrada, Fernando, 2011. "Taxation and political stability," MPRA Paper 32272, University Library of Munich, Germany.
  5. Mihai Mutascu, 2012. "Taxation under media capture," Economics Bulletin, AccessEcon, vol. 32(4), pages 2752-2767.
  6. Mutascu, Mihai, 2012. "Influence of clime conditions on tax revenues," MPRA Paper 40324, University Library of Munich, Germany.
  7. Frank Bohn, 2004. "The Trade-off between Monetary and Fiscal Solidity - International Lenders and Political Instability," Working Papers 200408, School Of Economics, University College Dublin.

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