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External Debt, Capital Flight and Political Risk

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  • Tabellini, Guido
  • Alesina, Alberto

Abstract

This paper explains the simultaneous occurrence of large external debts, private capital outflows and low domestic capital formation. We consider a general equilibrium model in which two government types with conflicting distributional goals randomly alternate in office. Uncertainty over the fiscal policies of future governments generates capital flight and small domestic investment, and induces the government to overaccumulate external debt. The model also predicts that left-wing governments are more inclined to restrict capital outflows than right-wing governments. Finally, we examine how political uncertainty affects the risk premium and how debt repudiation may occur after a regime change.

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File URL: http://dash.harvard.edu/bitstream/handle/1/4553019/alesina_externaldebt.pdf
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Bibliographic Info

Paper provided by Harvard University Department of Economics in its series Scholarly Articles with number 4553019.

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Date of creation: 1989
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Publication status: Published in Journal of International Economics
Handle: RePEc:hrv:faseco:4553019

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References

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  1. Rudiger Dornbusch, 1987. "Debt Problems and the World Macro Economy," NBER Working Papers 2379, National Bureau of Economic Research, Inc.
  2. R. Dornbusch, 1984. "External Debt, Budget Deficits and Disequilibrium Exchange Rates," Working papers 347, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. Alberto Alesina & Guido Tabellini, 1987. "A Positive Theory of Fiscal Deficits and Government Debt in a Democracy," NBER Working Papers 2308, National Bureau of Economic Research, Inc.
  4. Rudiger Dornbusch & Juan Carlos de Pablo, 1987. "Argentina: Debt and Macroeconomic Instability," NBER Working Papers 2378, National Bureau of Economic Research, Inc.
  5. Robert E. Cumby & Richard M. Levich, 1987. "On the Definition and Magnitude of Recent Capital Flight," NBER Working Papers 2275, National Bureau of Economic Research, Inc.
  6. Andrew Berg & Jeffrey Sachs, 1988. "The Debt Crisis: Structural Explanations of Country Performance," NBER Working Papers 2607, National Bureau of Economic Research, Inc.
  7. Eaton, Jonathan, 1987. "Public Debt Guarantees and Private Capital Flight," World Bank Economic Review, World Bank Group, vol. 1(3), pages 377-95, May.
  8. Alesina, Alberto, 1988. "Credibility and Policy Convergence in a Two-Party System with Rational Voters," American Economic Review, American Economic Association, vol. 78(4), pages 796-805, September.
  9. Sebastian Edwards, 1988. "Structural Adjustment Policies in Highly Indebted Countries," NBER Working Papers 2502, National Bureau of Economic Research, Inc.
  10. Grossman, Herschel I & Van Huyck, John B, 1988. "Sovereign Debt as a Contingent Claim: Excusable Default, Repudiation, and Reputation," American Economic Review, American Economic Association, vol. 78(5), pages 1088-97, December.
  11. Jonathan Eaton & Mark Gersovitz, 1987. "Country Risk and the Organization of International Capital Transfer," NBER Working Papers 2204, National Bureau of Economic Research, Inc.
  12. Alain Ize & Guillermo Ortiz, 1987. "Fiscal Rigidities, Public Debt, and Capital Flight," IMF Staff Papers, Palgrave Macmillan, vol. 34(2), pages 311-332, June.
  13. Fischer, Stanley, 1980. "Dynamic inconsistency, cooperation and the benevolent dissembling government," Journal of Economic Dynamics and Control, Elsevier, vol. 2(1), pages 93-107, May.
  14. Jeffrey Sachs & Daniel Cohen, 1982. "LDC Borrowing with Default Risk," NBER Working Papers 0925, National Bureau of Economic Research, Inc.
  15. Joshua Aizenman, 1987. "Investment, Openness, and Country Risk," NBER Working Papers 2410, National Bureau of Economic Research, Inc.
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