The Political Power of the Owners of Public Debt

Debora Di Gioacchino, Sergio Ginebri and Laura Sabani ()

Economics & Statistics Discussion Papers from University of Molise, Dept. SEGeS

Abstract: We develop a two period model to investigate what makes the promise to repay public debt credible. We explor a political solution excluding any role for long-run reputational arguments. There are two sources of heterogeneity among individuals: wealth and income. Differences in asset holdings determine individuals’ preferences over monetary policy; differences in incomes determine individuals’ preferences over fiscal policy. The bi-dimensionality of the political choice plays a fundamental role. We show, in fact, that political outcomes on the dimension perceived as less relevant might be decided by minority groups. In this sense, the very fact of issuing public debt creates a constituency in favour of repaying it and, under certain conditions, this constituency might be winning even though it is a minority group.

Keywords: public debt; credibility; political process; heterogeneity; interest groups. (search for similar items in EconPapers)
JEL-codes: D72 H60 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-pol
Date: 2003-06-13
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Journal Article: The Political Power of the Owners of Public Debt (2003)
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Persistent link: http://EconPapers.repec.org/RePEc:mol:ecsdps:esdp03006

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