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The trade-off between monetary and fiscal solidity : international lenders and political instability

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  • Frank Bohn

Abstract

This paper analysis the intertemporal public finance decision under political instability. The government’s choice between inflationary finance and foreign debt is constrained by an interest rate, which is affected both by market conditions and debt conditionality. The main result is that there is typically a trade-off between seigniorage taxation and foreign debt. There are two implications. First, monetary and fiscal solidity can typically not be achieved at the same time. Second, myopic behaviour produced by political instability leads to a reduction of seigniorage, not to an increase as argued, for instance, by Cukierman, Edwards and Tabellini (AER, 1992).

Suggested Citation

  • 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.
    • Handle: RePEc:ucn:wpaper:200408
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    File URL: http://hdl.handle.net/10197/1788
    File Function: First version, 2004
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    References listed on IDEAS

    as
    1. Svensson, Jakob, 1998. "Investment, property rights and political instability: Theory and evidence," European Economic Review, Elsevier, vol. 42(7), pages 1317-1341, July.
    2. Bohn, Frank, 2002. "Public Finance under Political Instability and Debt Conditionality," Economics Discussion Papers 8843, University of Essex, Department of Economics.
    3. Devereux, Michael B. & Wen, Jean-Francois, 1998. "Political instability, capital taxation, and growth," European Economic Review, Elsevier, vol. 42(9), pages 1635-1651, November.
    4. William D. Nordhaus, 1975. "The Political Business Cycle," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 42(2), pages 169-190.
    5. Cukierman, Alex & Edwards, Sebastian & Tabellini, Guido, 1992. "Seigniorage and Political Instability," American Economic Review, American Economic Association, vol. 82(3), pages 537-555, June.
    6. Isaac Ehrlich & Francis T. Lui, 1999. "Bureaucratic Corruption and Endogenous Economic Growth," Journal of Political Economy, University of Chicago Press, vol. 107(S6), pages 270-293, December.
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    Citations

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    Cited by:

    1. Bohn, Frank, 2007. "Polarisation, uncertainty and public investment failure," European Journal of Political Economy, Elsevier, vol. 23(4), pages 1077-1087, December.
    2. Frank Bohn, 2005. "Public Investment under Ethnic Diversity and Political Uncertainty," Working Papers 200501, School of Economics, University College Dublin.
    3. Frank Bohn, 2004. "White Elephants and the Limits to Efficient Investment," Working Papers 200413, School of Economics, University College Dublin.

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    More about this item

    Keywords

    Debt conditionality; Myopic behaviour; Political economy; Seigniorage; Government deficit; Public finance; Finance; Public; Political stability; Seigniorage (Finance);
    All these keywords.

    JEL classification:

    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development

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