The Political Power of the Owners of Public Debt
AbstractWe develop a two period model to investigate what makes the promise to repay public debt credible. We explor a political solution excluding any role for long-run reputational arguments. There are two sources of heterogeneity among individuals: wealth and income. Differences in asset holdings determine individuals’ preferences over monetary policy; differences in incomes determine individuals’ preferences over fiscal policy. The bi-dimensionality of the political choice plays a fundamental role. We show, in fact, that political outcomes on the dimension perceived as less relevant might be decided by minority groups. In this sense, the very fact of issuing public debt creates a constituency in favour of repaying it and, under certain conditions, this constituency might be winning even though it is a minority group.
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Bibliographic InfoPaper provided by University of Molise, Dept. SEGeS in its series Economics & Statistics Discussion Papers with number esdp03006.
Length: 26 pages
Date of creation: 13 Jun 2003
Date of revision:
public debt; credibility; political process; heterogeneity; interest groups.;
Other versions of this item:
- D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
- H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
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