Fiscal Rigidities, Public Debt, and Capital Flight

Alain Ize () and Guillermo Ortiz
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Guillermo Ortiz: International Monetary Fund

IMF Staff Papers, 1987, vol. 34, issue 2, 311-332

Abstract: This paper associates exchange rate crises and capital flight with the possibility of default on public debt resulting from fiscal rigidities. By including interest-bearing debt, both domestic and external, the model can generate the timing of an attack and can explain why domestic public bonds, even when perfectly indexed, cannot eliminate the possibility of a crisis. This fiscal framework provides explanations for the simultaneity of private capital flight and public foreign borrowing and wide observed fluctuations in real exchange rates, with recent Mexican experience as illustration.

Date: 1987
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