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Inflationary bias and state-owned financial institutions

  • Novaes, Walter
  • Werlang, Sergio

This article explains why the existence of state owned financial institutions makes it more difficult for a country to balance its budget. We show that states can use their financiaI institutions to transfer their deficits to the federal govemment. As a result, there is a bias towards Iarge deficits and high inflation rates. Our model also predicts that state owned financiaI institutions should underperform the market, mainly because they concentrate their portfolios on non-performing loans to their own shareholders, that is, the states. Brazil and Argentina are two countries with a history of high inflation that confirm our predictions .

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File URL: http://www.sciencedirect.com/science/article/B6VBV-4575SV2-6/2/3e43c01b9533c2294394fc6306089dd6
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Article provided by Elsevier in its journal Journal of Development Economics.

Volume (Year): 47 (1995)
Issue (Month): 1 (June)
Pages: 135-154

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Handle: RePEc:eee:deveco:v:47:y:1995:i:1:p:135-154
Contact details of provider: Web page: http://www.elsevier.com/locate/devec

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  1. Alesina, Alberto, 1987. "Macroeconomic Policy in a Two-party System as a Repeated Game," Scholarly Articles 4552531, Harvard University Department of Economics.
  2. Roger H. Gordon, 1982. "An Optimal Taxation Approach to Fiscal Federalism," NBER Working Papers 1004, National Bureau of Economic Research, Inc.
  3. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  4. Musgrave, Richard A, 1969. "Theories of Fiscal Federalism," Public Finance = Finances publiques, , vol. 24(4), pages 521-36.
  5. Persson, Torsten & Svensson, Lars E O, 1989. "Why a Stubborn Conservative Would Run a Deficit: Policy with Time-Inconsistent Preferences," The Quarterly Journal of Economics, MIT Press, vol. 104(2), pages 325-45, May.
  6. Alesina, Alberto & Tabellini, Guido, 1990. "A Positive Theory of Fiscal Deficits and Government Debt," Review of Economic Studies, Wiley Blackwell, vol. 57(3), pages 403-14, July.
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