The trade-off between monetary and fiscal solidity : international lenders and political instability
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).
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- Bohn, Frank, 2003.
"Public Finance under Political Instability and Debt Conditionality,"
Royal Economic Society Annual Conference 2003
25, Royal Economic Society.
- Bohn, Frank, 2002. "Public Finance under Political Instability and Debt Conditionality," Economics Discussion Papers 8843, University of Essex, Department of Economics.
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"Seigniorage and Political Instability,"
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- Isaac Ehrlich & Francis T. Lui, 1999. "Bureaucratic Corruption and Endogenous Economic Growth," Journal of Political Economy, University of Chicago Press, vol. 107(S6), pages S270-S293, December.
- Svensson, Jakob, 1998. "Investment, property rights and political instability: Theory and evidence," European Economic Review, Elsevier, vol. 42(7), pages 1317-1341, July.
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