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External Debt, Capital Flight and Political Risk

  • Alberto Alesina

    (UCLA)

  • Guido Tabellini

    (Harvard University)

This paper provides an explanation of the simultaneous occurrence of large accumulation of external debt, private capital outflow and relatively low domestic capital formation in developing countries. We consider a general equilibrium model in which two types of government with conflicting distributional goals randomly alternate in office. Uncertainty over the fiscal policies of future governments generates private capital flight and small domestic investment. This political uncertainty also provides the incentives for the current government to over accumulate external debt. The model also predicts that left wing governments are more inclined to impose restrictions on capital outflows than right wing governments. Finally, we examine how political uncertainty affects the risk premium charged by lenders and how debt repudiation may occur after a change of political regime.

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File URL: http://www.econ.ucla.edu/workingpapers/wp538.pdf
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Paper provided by UCLA Department of Economics in its series UCLA Economics Working Papers with number 538.

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Date of creation: 01 Nov 1988
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Handle: RePEc:cla:uclawp:538
Contact details of provider: Web page: http://www.econ.ucla.edu/

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  1. Eaton, Jonathan, 1987. "Public Debt Guarantees and Private Capital Flight," World Bank Economic Review, World Bank Group, vol. 1(3), pages 377-95, May.
  2. Alain Ize & Guillermo Ortiz, 1987. "Fiscal Rigidities, Public Debt, and Capital Flight," IMF Staff Papers, Palgrave Macmillan, vol. 34(2), pages 311-332, June.
  3. Alesina, Alberto, 1988. "Credibility and Policy Convergence in a Two-Party System with Rational Voters," American Economic Review, American Economic Association, vol. 78(4), pages 796-805, September.
  4. Rudiger Dornbusch & Juan Carlos de Pablo, 1987. "Argentina: Debt and Macroeconomic Instability," NBER Working Papers 2378, National Bureau of Economic Research, Inc.
  5. Robert E. Cumby & Richard M. Levich, 1987. "On the Definition and Magnitude of Recent Capital Flight," NBER Working Papers 2275, National Bureau of Economic Research, Inc.
  6. Jeffrey Sachs & Daniel Cohen, 1982. "LDC Borrowing with Default Risk," NBER Working Papers 0925, National Bureau of Economic Research, Inc.
  7. Rudiger Dornbusch, 1984. "External Debt, Budget Deficits and Disequilibrium Exchange Rates," NBER Working Papers 1336, National Bureau of Economic Research, Inc.
  8. Sebastian Edwards, 1989. "Structural Adjustment Policies in Highly Indebted Countries," NBER Chapters, in: Developing Country Debt and Economic Performance, Volume 1: The International Financial System, pages 159-208 National Bureau of Economic Research, Inc.
  9. Andrew Berg & Jeffrey Sachs, 1988. "The Debt Crisis: Structural Explanations of Country Performance," NBER Working Papers 2607, National Bureau of Economic Research, Inc.
  10. Rudiger Dornbusch, 1989. "Debt Problems and the World Macroeconomy," NBER Chapters, in: Developing Country Debt and the World Economy, pages 299-312 National Bureau of Economic Research, Inc.
  11. Fischer, Stanley, 1980. "Dynamic inconsistency, cooperation and the benevolent dissembling government," Journal of Economic Dynamics and Control, Elsevier, vol. 2(1), pages 93-107, May.
  12. Joshua Aizenman, 1987. "Investment, Openness, and Country Risk," NBER Working Papers 2410, National Bureau of Economic Research, Inc.
  13. Jonathan Eaton & Mark Gersovitz, 1987. "Country Risk and the Organization of International Capital Transfer," NBER Working Papers 2204, National Bureau of Economic Research, Inc.
  14. Herschel I. Grossman & John B. Van Huyck, 1985. "Sovereign Debt as a Contingent Claim: Excusable Default, Repudiation, and Reputation," NBER Working Papers 1673, National Bureau of Economic Research, Inc.
  15. Alberto Alesina, 1987. "A Positive Theory of Fiscal Deficits and Government Debt in a Democracy," UCLA Economics Working Papers 435, UCLA Department of Economics.
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