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Public Finance under Political Instability and Debt Conditionality

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  • Bohn, Frank

Abstract

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.

Suggested Citation

  • Bohn, Frank, 2002. "Public Finance under Political Instability and Debt Conditionality," Economics Discussion Papers 8843, University of Essex, Department of Economics.
    • Handle: RePEc:esx:essedp:8843
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    References listed on IDEAS

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    1. Oliver Hart & John Moore, 1998. "Default and Renegotiation: A Dynamic Model of Debt," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 113(1), pages 1-41.
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    3. Svensson, Jakob, 1998. "Investment, property rights and political instability: Theory and evidence," European Economic Review, Elsevier, vol. 42(7), pages 1317-1341, July.
    4. Alesina, Alberto & Tabellini, Guido, 1989. "External debt, capital flight and political risk," Journal of International Economics, Elsevier, vol. 27(3-4), pages 199-220, November.
    5. Schultz, Christian, 1999. "Monetary Policy, Delegation and Polarisation," Economic Journal, Royal Economic Society, vol. 109(455), pages 164-178, April.
    6. Salemi, Michael K & Sargent, Thomas J, 1979. "The Demand for Money during Hyperinflation under Rational Expectations: II," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 20(3), pages 741-758, October.
    7. 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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    9. Morris Goldstein, 2001. "IMF Structural Conditionality: How Much is Too Much?," Working Paper Series WP01-4, Peterson Institute for International Economics.
    10. 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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    Citations

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    Cited by:

    1. Mutascu, Mihai & Tiwari, Aviral & Estrada, Fernando, 2011. "Taxation and political stability," MPRA Paper 36855, University Library of Munich, Germany, revised Feb 2012.
    2. Ayşe ATILGAN-YAŞA & Selim ŞANLISOY & Ahmet ÖZEN, 2020. "The Relationship Between Political Instability and Budget Consistency: 1984- 2018 Period Analysis in Turkey," Sosyoekonomi Journal, Sosyoekonomi Society, issue 28(44).
    3. Frank Bohn, 2004. "The trade-off between monetary and fiscal solidity : international lenders and political instability," Working Papers 200408, School of Economics, University College Dublin.
    4. Zhang, Yuewen, 2010. "Sovereign Risk Management in Recession: The Cases of Sweden and China," MPRA Paper 23364, University Library of Munich, Germany.
    5. Mihai Mutascu, 2012. "Taxation under media capture," Economics Bulletin, AccessEcon, vol. 32(4), pages 2752-2767.
    6. Estrada, Fernando & Mutascu, Mihai & Tiwari, Aviral, 2011. "Estabilidad política y tributación [Taxation and political stability]," MPRA Paper 32414, University Library of Munich, Germany.
    7. Aviral Tiwari, 2013. "Taxation, Economic Growth and Political Stability," Transition Studies Review, Springer;Central Eastern European University Network (CEEUN), vol. 20(1), pages 49-61, April.
    8. Estrada, Fernando, 2013. "Estabilidad política y poder fiscal [political stability and tax power]," MPRA Paper 58458, University Library of Munich, Germany, revised 2014.
    9. Mihai Mutascu, 2014. "Influence of climate conditions on tax revenues," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 8(3), September.

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    More about this item

    Keywords

    monetary and fiscal stability; political economy; IMF conditionality; government revenue; debt ceiling; public investment;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • H61 - Public Economics - - National Budget, Deficit, and Debt - - - Budget; Budget Systems

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