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Explaining fiscal policies and inflation in developing countries

  • Edwards, Sebastian
  • Tabellini, Guido

In this paper we investigate erririca1ly the determinants of inflation, seigniorage an fiscal deficits in developing countries. We first test the optimal taxation theory of inflation for a grip of 21 LDCs. We find that the implications of this theory is rejected for all the countries. We then proceed to implement a number of tests based on the new political economy approach to macroeconomic policies: we deal with some of the implications of a credibility and reputation model, and of a strategic government behavior model. We find that the data supports the most important predictions of the political economy view of fiscal policy. Our measures of political instability and political polarization play an important role in explaining cross country differences in seigniorage, inflation, government borrowing and fiscal deficits. We end by discussing directions for future research.

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Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 10 (1991)
Issue (Month): 1, Supplement (March)
Pages: S16-S48

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Handle: RePEc:eee:jimfin:v:10:y:1991:i:supplement1:p:s16-s48
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30443

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  1. Alesina, Alberto & Drazen, Allan, 1991. "Why Are Stabilizations Delayed?," American Economic Review, American Economic Association, vol. 81(5), pages 1170-88, December.
  2. Cukierman, Alex & Edwards, Sebastian & Tabellini, Guido, 1992. "Seigniorage and Political Instability," American Economic Review, American Economic Association, vol. 82(3), pages 537-55, June.
  3. Poterba, James M & Rotemberg, Julio J, 1990. "Inflation and Taxation with Optimizing Governments," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 22(1), pages 1-18, February.
  4. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  5. Faig, Miquel, 1988. "Characterization of the optimal tax on money when it functions as a medium of exchange," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 137-148, July.
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