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Do Good Or Do Well? Public Debt Management In A Two‐Party Economy

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  • Gian Maria Milesi‐Ferretti

Abstract

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.

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  • Gian Maria Milesi‐Ferretti, 1995. "Do Good Or Do Well? Public Debt Management In A Two‐Party Economy," Economics and Politics, Wiley Blackwell, vol. 7(1), pages 59-78, March.
    • Handle: RePEc:bla:ecopol:v:7:y:1995:i:1:p:59-78
    DOI: 10.1111/j.1468-0343.1995.tb00104.x
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    2. Rune Jansen Hagen & Gaute Torsvik, 2007. "Irreversible Investments, Dynamic Inconsistency and Policy Convergence," CESifo Working Paper Series 1910, CESifo.
    3. Howell, William & Shepsle, Kenneth & Wolton, Stephane, 2020. "Executive Absolutism: A Model," MPRA Paper 98221, University Library of Munich, Germany.
    4. Uhlig, H.F.H.V.S., 1997. "Long Term Debt and the Political Support for a Monetary Union," Discussion Paper 1997-13, Tilburg University, Center for Economic Research.
    5. Bank for International Settlements, 2011. "Interactions of sovereign debt management with monetary conditions and financial stability," CGFS Papers, Bank for International Settlements, number 42, december.
    6. Caselli, Francesco, 1997. "On the distribution of debt and taxes," Journal of Public Economics, Elsevier, vol. 65(3), pages 367-386, September.
    7. Nuno Ribeiro & Susana Jorge & Mercedes Cervera, 2013. "Estudo do Endividamento da Administração Local Portuguesa: Evidência Empírica USando Modelos de Análise de Dados em Painel," Notas Económicas, Faculty of Economics, University of Coimbra, issue 38, pages 46-67, December.
    8. Leopoldo Fergusson & James A. Robinson & Ragnar Torvik & Juan F. Vargas, 2016. "The Need for Enemies," Economic Journal, Royal Economic Society, vol. 126(593), pages 1018-1054, June.
    9. Eric Hansen, 2003. "Objectives, Targets and Instruments for Crown Financial Policy," Treasury Working Paper Series 03/21, New Zealand Treasury.
    10. Jonsson, Gunnar, 1997. "Monetary politics and unemployment persistence," Journal of Monetary Economics, Elsevier, vol. 39(2), pages 303-325, July.
    11. Javier Salinas, 1998. "The Constitutional Political Economy of Public Deficits: The Spanish Case 1," Constitutional Political Economy, Springer, vol. 9(3), pages 235-249, September.

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