Interest Rates and Bond-Financed Deficits in a Ricardian Two-Party Democracy
The thesis of this paper is that political differences between parties are a major explanation of inflation and variations in it, and therefore introduce into real interest rates a risk premium which will vary with creditors' exposure to 'inflationary default', i.e., with the level of public debt. The paper tests a number of predictions of this theory. First, that political parties do differ in their policy behaviour (contrary to the median voter theorem); this is clearly supported by postwar evidence for the United Kingdom, West Germany and Sweden. Second, expected real interest rates on bonds are related to budget deficits and/or public debt, according to evidence for the United States and United Kingdom from 1920 to 1982. Third, we find some modest but (as we expected from the indirectness of the relationship) rather weak evidence of a connection between which party was in power and the level and variability of inflation in the same period for these two countries. Fourth, the theory provides a rationale for the commonly observed relationship between inflation and its variability.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
|Date of creation:||Nov 1985|
|Date of revision:|
|Contact details of provider:|| Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ.|
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
|Order Information:|| Email: |
When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:79. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()The email address of this maintainer does not seem to be valid anymore. Please ask to update the entry or send us the correct email address
If references are entirely missing, you can add them using this form.