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Public Finance under Political Instability and Debt Conditionality

  • Frank Bohn

    ()

This paper presents an intertemporal political economy model of sustainable public finance relevant for many developing or transition countries: instability is inherent to the political structure and foreign debt is a crucial source of government revenue. The main results are: First, political instability causes myopic government behaviour as it induces higher debt levels, but it does not lead to an increase in inflation taxation as in Cukierman, et al. (1992). Second, debt conditionality aiming at monetary stability is particularly effective in heterogeneous societies with unstable governments. Third, it is shown that IMF policies requiring debtor countries to achieve both monetary and fiscal stability are suboptimal.

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File URL: http://www.essex.ac.uk/economics/discussion-papers/papers-text/dp540.pdf
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Paper provided by University of Essex, Department of Economics in its series Economics Discussion Papers with number 540.

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Date of creation: 10 Jun 2002
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Handle: RePEc:esx:essedp:540
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  1. Tabellini, Guido & Alesina, Alberto, 1989. "External Debt, Capital Flight and Political Risk," Scholarly Articles 4553019, Harvard University Department of Economics.
  2. Tabellini, Guido & Alesina, Alberto, 1990. "Voting on the Budget Deficit," Scholarly Articles 4553030, Harvard University Department of Economics.
  3. Christian Schultz, 1998. "Monetary Policy, Delegation and Polarization," Discussion Papers 98-17, University of Copenhagen. Department of Economics.
  4. Schultz, Christian, 2002. "Policy biases with voters' uncertainty about the economy and the government," European Economic Review, Elsevier, vol. 46(3), pages 487-506, March.
  5. Devereux, Michael B. & Wen, Jean-Francois, 1998. "Political instability, capital taxation, and growth," European Economic Review, Elsevier, vol. 42(9), pages 1635-1651, November.
  6. Cavalcanti Ferreira, Pedro, 1999. "Inflationary financing of public investment and economic growth," Journal of Economic Dynamics and Control, Elsevier, vol. 23(4), pages 539-563, February.
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