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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)

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 Function: First version, 2004
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Bibliographic 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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Related research

Keywords: debt conditionality; myopic behaviour; political economy; seigniorage; government deficit; public finance;

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References

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  1. Svensson, Jakob, 1998. "Investment, property rights and political instability: Theory and evidence," European Economic Review, Elsevier, vol. 42(7), pages 1317-1341, July.
  2. �, 1995. "Conditionality: Past, Present, Future," IMF Staff Papers, Palgrave Macmillan, vol. 42(4), pages 792-835, December.
  3. Bohn, Frank, 2003. "Public Finance under Political Instability and Debt Conditionality," Royal Economic Society Annual Conference 2003 25, Royal Economic Society.
  4. Nordhaus, William D, 1975. "The Political Business Cycle," Review of Economic Studies, Wiley Blackwell, vol. 42(2), pages 169-90, April.
  5. 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.
  6. Devereux, Michael B. & Wen, Jean-Francois, 1998. "Political instability, capital taxation, and growth," European Economic Review, Elsevier, vol. 42(9), pages 1635-1651, November.
  7. Alex Cukierman & Sebastian Edwards & Guido Tabellini, 1989. "Seigniorage and Political Instability," NBER Working Papers 3199, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Bohn, Frank, 2007. "Polarisation, uncertainty and public investment failure," European Journal of Political Economy, Elsevier, vol. 23(4), pages 1077-1087, December.
  2. Frank Bohn, 2005. "Public Investment under Ethnic Diversity and Political Uncertainty," Working Papers 200501, School Of Economics, University College Dublin.
  3. Frank Bohn, 2004. "White Elephants and the Limits to Efficient Investment," Working Papers 200413, School Of Economics, University College Dublin.

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