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Public Finance under Political Instability and Debt Conditionality

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  • Frank Bohn

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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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Paper provided by University of Essex, Department of Economics in its series Economics Discussion Papers with number 540.

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Date of creation: 10 Jun 2002
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Handle: RePEc:esx:essedp:540

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  1. Schultz, Christian, 1999. "Monetary Policy, Delegation and Polarisation," Economic Journal, Royal Economic Society, vol. 109(455), pages 164-78, April.
  2. 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.
  3. Alesina, Alberto F & Tabellini, Guido, 1988. "Voting on the Budget Deficit," CEPR Discussion Papers 269, C.E.P.R. Discussion Papers.
  4. Alesina, Alberto & Tabellini, Guido, 1989. "External debt, capital flight and political risk," Journal of International Economics, Elsevier, vol. 27(3-4), pages 199-220, November.
  5. 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.
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Cited by:
  1. 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.
  2. Zhang, Yuewen, 2010. "Sovereign Risk Management in Recession: The Cases of Sweden and China," MPRA Paper 23364, University Library of Munich, Germany.
  3. Mihai Mutascu, 2012. "Taxation under media capture," Economics Bulletin, AccessEcon, vol. 32(4), pages 2752-2767.
  4. Mutascu, Mihai, 2012. "Influence of clime conditions on tax revenues," MPRA Paper 40324, University Library of Munich, Germany.
  5. Mutascu, Mihai & Tiwari, Aviral & Estrada, Fernando, 2011. "Taxation and political stability," MPRA Paper 36855, University Library of Munich, Germany, revised Feb 2012.
  6. Estrada, Fernando & Mutascu, Mihai & Tiwari, Aviral, 2011. "Estabilidad política y tributación
    [Taxation and political stability]
    ," MPRA Paper 32414, University Library of Munich, Germany.
  7. Aviral Tiwari, 2013. "Taxation, Economic Growth and Political Stability," Transition Studies Review, Springer, vol. 20(1), pages 49-61, April.

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