Do Good Or Do Well? Public Debt Management In A Two-Party Economy
Governments facing elections may strategically manipulate policy instruments in order to increase their re-election chances. The incentives for strategic manipulation are studied in the context of a debt management model, in which two parties with different inflation aversion compete in elections. It is shown that the inflation-averse party may issue nominal debt in order to make its opponent "look bad" to voters, thus getting closer to the median voter. Nominal debt artificially enlarges the ex-post inflation tax base, causing higher inflation. Conversely, an inflation-prone government may issue indexed debt in order to reduce inflation incentives. Copyright 1995 Blackwell Publishers Ltd..
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Volume (Year): 7 (1995)
Issue (Month): 1 (March)
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