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Eliminating the Inflationary Finance Trap in a Politically Unstable Country: Domestic Politics versus International Pressure

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Frank Bohn

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Abstract

This paper presents an intertemporal political economy model of public finance relevant for developing and transition countries where there is inherent political instability. As in Cukierman, et al. (1992), it is shown that political instability causes myopic behaviour by a rational government resulting in high levels of revenue from seigniorage. It is then argued that inflationary finance also increases barter and currency substitution, but if the government tries to suppress them, seigniorage taxation rises even more. Only international financial pressure can help eliminate the inflationary finance trap, but becomes less effective as the instability increases.

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Paper provided by University of Essex, Department of Economics in its series Economics Discussion Papers with number 551.

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Date of creation: 21 Oct 2002
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Handle: RePEc:esx:essedp:551

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  1. Devereux, Michael B. & Wen, Jean-Francois, 1998. "Political instability, capital taxation, and growth," European Economic Review, Elsevier, vol. 42(9), pages 1635-1651, November. [Downloadable!] (restricted)
  2. Hayashi, Fumio & Matsui, Akihiko, 1996. "A Model of Fiat Money and Barter," Journal of Economic Theory, Elsevier, vol. 68(1), pages 111-132, January. [Downloadable!] (restricted)
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  3. Tabellini, Guido & Alesina, Alberto, 1990. "Voting on the Budget Deficit," American Economic Review, American Economic Association, vol. 80(1), pages 37-49, March. [Downloadable!] (restricted)
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  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. [Downloadable!] (restricted)
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  5. Nordhaus, William D, 1975. "The Political Business Cycle," Review of Economic Studies, Blackwell Publishing, vol. 42(2), pages 169-90, April. [Downloadable!] (restricted)
  6. Cukierman, Alex & Edwards, Sebastian & Tabellini, Guido, 1992. "Seigniorage and Political Instability," American Economic Review, American Economic Association, vol. 82(3), pages 537-55, June. [Downloadable!] (restricted)
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  7. Christiano, Lawrence J, 1987. "Cagan's Model of Hyperinflation under Rational Expectations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(1), pages 33-49, February. [Downloadable!] (restricted)
  8. 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. [Downloadable!] (restricted)
  9. 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. [Downloadable!] (restricted)
  10. Isaac Ehrlich & Francis T. Lui, 1999. "Bureaucratic Corruption and Endogenous Economic Growth," Journal of Political Economy, University of Chicago Press, vol. 107(S6), pages S270-S293, December. [Downloadable!] (restricted)
  11. Cohen, Daniel, 1993. "Growth and External Debt," CEPR Discussion Papers 778, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  12. Morris Goldstein, 2001. "IMF Structural Conditionality: How Much is Too Much?," Peterson Institute Working Paper Series WP01-4, Peterson Institute for International Economics. [Downloadable!]
  13. Sargent, Thomas J, 1977. "The Demand for Money During Hyperinflations under Rational Expectations: I," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 18(1), pages 59-82, February. [Downloadable!] (restricted)
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  14. Schultz, Christian, 1999. "Monetary Policy, Delegation and Polarisation," Economic Journal, Royal Economic Society, vol. 109(455), pages 164-78, April. [Downloadable!] (restricted)
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  15. Svensson, Jakob, 1998. "Investment, property rights and political instability: Theory and evidence," European Economic Review, Elsevier, vol. 42(7), pages 1317-1341, July. [Downloadable!] (restricted)
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  1. Frank Bohn, 2006. "Greed, Impatience and Exchange Rate Determination," Working Papers 200605, School Of Economics, University College Dublin. [Downloadable!]
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