Elections, Capital Flows, and Politico-economic Equilibria

Roberto Chang

American Economic Review, 2010, vol. 100, issue 4, 1759-77

Abstract: We study an open economy where a pro-labor and a pro-business candidate compete in an election. The winner chooses taxes, which affect investment returns. Electoral outcomes depend on the size of the foreign debt, but the debt itself reflects expectations about the election. The resulting interaction is novel and has several implications. Elections are associated with increased volatility. Politico-economic crises can occur. Inefficiencies vanish if the candidates commit to an appropriate tax policy, but such commitments have predictable effects on the election. Empirical evidence supporting the theory is discussed. (JEL D72, F34, O17, O19)

JEL-codes: D72 F34 O17 O19 (search for similar items in EconPapers)
Date: 2010
Note: DOI: 10.1257/aer.100.4.1759
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Citations: View citations in EconPapers (14)

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