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Inflationary bias and state owned financial institutions

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  • Novaes Filho, Walter
  • Werlang, Sergio Ribeiro da Costa

Abstract

This article explains why the existence of state owned financial institutions makes it moredifficult for a country to balance its budget. We show that states can use their financiaIinstitutions to transfer their deficits to the federal govemment. As a result, there is a biastowards Iarge deficits and high inflation rates. Our model also predicts that state ownedfinanciaI institutions should underperform the market, mainly because they concentrate theirportfolios on non-performing loans to their own shareholders, that is, the states. Brazil andArgentina are two countries with a history of high inflation that confirm our predictions .

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Paper provided by FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil) in its series Economics Working Papers (Ensaios Economicos da EPGE) with number 242.

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Date of creation: Jun 1994
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Handle: RePEc:fgv:epgewp:242

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  1. Roger H. Gordon, 1982. "An Optimal Taxation Approach to Fiscal Federalism," NBER Working Papers, National Bureau of Economic Research, Inc 1004, National Bureau of Economic Research, Inc.
  2. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(3), pages 401-19, June.
  3. Persson, Torsten & Svensson, Lars E O, 1989. "Why a Stubborn Conservative Would Run a Deficit: Policy with Time-Inconsistent Preferences," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 104(2), pages 325-45, May.
  4. Alesina, Alberto, 1987. "Macroeconomic Policy in a Two-party System as a Repeated Game," Scholarly Articles, Harvard University Department of Economics 4552531, Harvard University Department of Economics.
  5. Musgrave, Richard A, 1969. "Theories of Fiscal Federalism," Public Finance = Finances publiques, , , vol. 24(4), pages 521-36.
  6. Tabellini, Guido & Alesina, Alberto, 1990. "A Positive Theory of Fiscal Deficits and Government Debt," Scholarly Articles, Harvard University Department of Economics 3612769, Harvard University Department of Economics.
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Cited by:
  1. Boudriga, Abdelkader & Boulila, Neila & Jellouli, Sana, 2009. "Does bank supervision impact nonperforming loans : cross-country determinants using agregate data ?," MPRA Paper, University Library of Munich, Germany 18068, University Library of Munich, Germany.

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