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The Trade-off between Monetary and Fiscal Solidity - International Lenders and Political Instability

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Author Info
Frank Bohn (University College Dublin)

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Abstract

This 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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File URL: http://www.ucd.ie/economics/research/papers/2004/WP04.08.pdf
File Format: application/pdf
File Function: First version, 2004
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Publisher Info
Paper provided by School Of Economics, University College Dublin in its series Working Papers with number 200408.

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Length: 27 pages
Date of creation: 11 May 2004
Date of revision:
Handle: RePEc:ucn:wpaper:200408

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Postal: UCD, Belfield, Dublin 4
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Related research
Keywords: 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
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

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  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. Nordhaus, William D, 1975. "The Political Business Cycle," Review of Economic Studies, Blackwell Publishing, vol. 42(2), pages 169-90, April. [Downloadable!] (restricted)
  3. 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)
    Other versions:
  4. 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)
  5. Frank Bohn, 2002. "Public Finance under Political Instability and Debt Conditionality," Economics Discussion Papers 540, University of Essex, Department of Economics. [Downloadable!]
    Other versions:
  6. 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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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Frank Bohn, 2004. "White Elephants and the Limits to Efficient Investment," Working Papers 200413, School Of Economics, University College Dublin. [Downloadable!]
  2. Frank Bohn, 2005. "Public Investment under Ethnic Diversity and Political Uncertainty," Working Papers 200501, School Of Economics, University College Dublin. [Downloadable!]
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