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Eliminating the Inflationary Finance Trap in a Politically Unstable Country: Domestic Politics versus International Pressure

  • Frank Bohn

This paper presents an intertemporal political economy model of public finance relevant for developing and transition countries where there is inherent political instability. As in Cukierman, et al. (1992), it is shown that political instability causes myopic behaviour by a rational government resulting in high levels of revenue from seigniorage. It is then argued that inflationary finance also increases barter and currency substitution, but if the government tries to suppress them, seigniorage taxation rises even more. Only international financial pressure can help eliminate the inflationary finance trap, but becomes less effective as the instability increases.

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Paper provided by University of Essex, Department of Economics in its series Economics Discussion Papers with number 551.

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Date of creation: 21 Oct 2002
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Handle: RePEc:esx:essedp:551
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  1. Alesina, Alberto F & Tabellini, Guido, 1988. "Voting on the Budget Deficit," CEPR Discussion Papers 269, C.E.P.R. Discussion Papers.
  2. Alesina, Alberto F & Tabellini, Guido, 1988. "External Debt, Capital Flight and Political Risk," CEPR Discussion Papers 253, C.E.P.R. Discussion Papers.
  3. Christian Schultz, . "Monetary Policy, Delegation and Polarization," EPRU Working Paper Series 98-19, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
  4. 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.
  5. 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.
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