The Trade-off between Monetary and Fiscal Solidity - International Lenders and Political Instability
AbstractThis paper analysis the intertemporal public finance decision under political instability. The government’s choice between inflationary finance and foreign debt is constrained by an interest rate, which is affected both by market conditions and debt conditionality. The main result is that there is typically a trade-off between seigniorage taxation and foreign debt. There are two implications. First, monetary and fiscal solidity can typically not be achieved at the same time. Second, myopic behaviour produced by political instability leads to a reduction of seigniorage, not to an increase as argued, for instance, by Cukierman, Edwards and Tabellini (AER, 1992).
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Bibliographic InfoPaper provided by School Of Economics, University College Dublin in its series Working Papers with number 200408.
Length: 27 pages
Date of creation: 11 May 2004
Date of revision:
debt conditionality; myopic behaviour; political economy; seigniorage; government deficit; public finance;
Find related papers by JEL classification:
- E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
- F34 - International Economics - - International Finance - - - International Lending and Debt Problems
- O23 - Economic Development, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development
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