Long Term Debt and the Political Support of a Monetary Union

Harald Uhlig ()

No 1603, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper examines the role of long-term debt in political support for a monetary union or, more generally, an inflation-reduction policy. The central idea is that the decision on membership of the union leads to a redistribution between debtors and creditors, if they are holding long-term debt with a nominally fixed interest rate, as well as taxpayers. For example, if joining the union means a decrease in the inflation rate, creditors should favour joining while debtors should be against it. A government of a high-inflation country might strategically try to exploit this effect by selling more long-term debt denominated in its own currency at a fixed nominal rate rather than a foreign currency such as the dollar (or, almost equivalently, as floating-rate debt or rolled-over short-term debt) to its citizens. We show that the effect on political support is unclear. While the ‘creditor effect’ of increasing the number of agents holding domestically denominated debt helps generate support for joining the union, the ‘tax effect’ of having to raise more taxes in order to pay for the increased real-debt payments after a successful monetary union works in the opposite way. The paper then studies a number of special cases and ramifications; the case of Italy is examined more closely. The paper argues that recent debt-management policy in Italy probably eroded political support for actions aimed at enhancing EMU membership chances.

Keywords: Debt Management; EMU; Monetary Policy; Political Economy; Redistribution (search for similar items in EconPapers)
JEL-codes: E44 E50 E63 G18 H63 (search for similar items in EconPapers)
Date: 1997-03
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=1603 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Working Paper: Long Term Debt and the Political Support for a Monetary Union (1997)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:1603

Ordering information: This working paper can be ordered from
http://www.cepr.org/ ... ers/dp.php?dpno=1603

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().