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Eliminating The Inflationary Finance Trap In A Politically Unstable Country: Domestic Politics Vs. International Pressure

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  • FRANK BOHN

Abstract

This paper presents an intertemporal political economy model of public finance relevant for developing and transition countries where there is inherent political instability. As in Cukierman et al. (1992), it is shown that political instability causes myopic behaviour by a rational government resulting in high levels of revenue from seigniorage. It is then argued that inflationary finance also increases barter and currency substitution, but if the government tries to suppress them, seigniorage taxation rises even more. Only international financial pressure can help eliminate the inflationary finance trap, but becomes less effective as the instability increases. Copyright 2006 Blackwell Publishing Ltd..

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  • Frank Bohn, 2006. "Eliminating The Inflationary Finance Trap In A Politically Unstable Country: Domestic Politics Vs. International Pressure," Economics and Politics, Wiley Blackwell, vol. 18(1), pages 71-94, March.
  • Handle: RePEc:bla:ecopol:v:18:y:2006:i:1:p:71-94
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    1. Bertola, Giuseppe, 1993. "Factor Shares and Savings in Endogenous Growth," American Economic Review, American Economic Association, vol. 83(5), pages 1184-1198, December.
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    5. Berg, Andrew & Sachs, Jeffrey, 1988. "The debt crisis structural explanations of country performance," Journal of Development Economics, Elsevier, pages 271-306.
    6. Persson, Torsten & Tabellini, Guido, 1994. "Is Inequality Harmful for Growth?," American Economic Review, American Economic Association, vol. 84(3), pages 600-621, June.
    7. Wiesner, Eduardo, 1985. "Latin American Debt: Lessons and Pending Issues," American Economic Review, American Economic Association, vol. 75(2), pages 191-195, May.
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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.

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