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External Debt, Capital Flight and Political Risk

  • Alberto Alesina
  • Guido Tabellini

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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2610.

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Date of creation: Jun 1988
Date of revision:
Publication status: published as Journal of International Economics, Vol. 27, No. 4, pp. 199-220, November 1989.
Handle: RePEc:nbr:nberwo:2610
Note: ME
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  1. Jeffrey Sachs & Daniel Cohen, 1982. "LDC Borrowing with Default Risk," NBER Working Papers 0925, National Bureau of Economic Research, Inc.
  2. Sebastian Edwards, 1988. "Structural Adjustment Policies in Highly Indebted Countries," NBER Working Papers 2502, National Bureau of Economic Research, Inc.
  3. Andrew Berg & Jeffrey Sachs, 1988. "The Debt Crisis: Structural Explanations of Country Performance," NBER Working Papers 2607, National Bureau of Economic Research, Inc.
  4. Alberto Alesina & Guido Tabellini, 1987. "A Positive Theory of Fiscal Deficits and Government Debt in a Democracy," NBER Working Papers 2308, National Bureau of Economic Research, Inc.
  5. Jonathan Eaton & Mark Gersovitz, 1987. "Country Risk and the Organization of International Capital Transfer," NBER Working Papers 2204, National Bureau of Economic Research, Inc.
  6. Rudiger Dornbusch & Juan Carlos de Pablo, 1987. "Argentina: Debt and Macroeconomic Instability," NBER Working Papers 2378, National Bureau of Economic Research, Inc.
  7. Joshua Aizenman, 1987. "Investment, Openness, and Country Risk," NBER Working Papers 2410, National Bureau of Economic Research, Inc.
  8. 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.
  9. 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.
  10. Rudiger Dornbusch, 1984. "External Debt, Budget Deficits and Disequilibrium Exchange Rates," NBER Working Papers 1336, National Bureau of Economic Research, Inc.
  11. Grossman, Herschel I & Van Huyck, John B, 1988. "Sovereign Debt as a Contingent Claim: Excusable Default, Repudiation, and Reputation," American Economic Review, American Economic Association, vol. 78(5), pages 1088-97, December.
  12. 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.
  13. Jonathan Eaton, 1987. "Public Debt Guarantees and Private Capital Flight," NBER Working Papers 2172, National Bureau of Economic Research, Inc.
  14. Alain Ize & Guillermo Ortiz, 1987. "Fiscal Rigidities, Public Debt, and Capital Flight," IMF Staff Papers, Palgrave Macmillan, vol. 34(2), pages 311-332, June.
  15. 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.
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