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Fiscal uncertainty with donor herding and domestic debt crisis

  • Yohane Khamfula

    ()

    (Department of Economics, Stellenbosch University)

This study attempts to analyse how uncertainty about future government spending affects the representative individual’s lifetime utility by using a discrete inter-temporal optimizing model. Intuitively, the study shows that the overall effect of a highly positive domestic-debt repayment gap is such that the expected government spending for the next period will go down. The implication of the reduction in government spending due to uncertainty about future debt servicing is that the output and the corresponding investment for the next period will be expected to go down. This outcome is further reinforced by the higher taxes imposed on consumers in an attempt to minimise the next period’s domestic-debt repayment gap.

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File URL: http://www.ekon.sun.ac.za/wpapers/2006/wp072006/wp-07-2006.pdf
File Function: First version, 2006
Download Restriction: no

Paper provided by Stellenbosch University, Department of Economics in its series Working Papers with number 07/2006.

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Date of creation: 2006
Date of revision:
Handle: RePEc:sza:wpaper:wpapers21
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  1. Ephraim W. Chirwa & Montfort Mlachila & Yohane Anthony Khamfula, 2006. "Donor Herding and Domestic Debt Crisis," IMF Working Papers 06/109, International Monetary Fund.
  2. Rudiger Dornbusch, 1986. "Exchange Rate Economics: 1986," NBER Working Papers 2071, National Bureau of Economic Research, Inc.
  3. Bulír, Ales & Hamann, A. Javier, 2008. "Volatility of Development Aid: From the Frying Pan into the Fire?," World Development, Elsevier, vol. 36(10), pages 2048-2066, October.
  4. Daniel, Betty C, 1989. "One-Sided Uncertainty about Future Fiscal Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 21(2), pages 176-89, May.
  5. Ale Bulir & A. Javier Hamann, 2003. "Aid Volatility: An Empirical Assessment," IMF Staff Papers, Palgrave Macmillan, vol. 50(1), pages 4.
  6. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
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