Public Finance under Political Instability and Debt Conditionality

Frank Bohn

Economics Discussion Papers from University of Essex, Department of Economics

Abstract: This paper presents an intertemporal political economy model of sustainable public finance relevant for many developing or transition countries: instability is inherent to the political structure and foreign debt is a crucial source of government revenue. The main results are: First, political instability causes myopic government behaviour as it induces higher debt levels, but it does not lead to an increase in inflation taxation as in Cukierman, et al. (1992). Second, debt conditionality aiming at monetary stability is particularly effective in heterogeneous societies with unstable governments. Third, it is shown that IMF policies requiring debtor countries to achieve both monetary and fiscal stability are suboptimal.

Keywords: monetary and fiscal stability; political economy; IMF conditionality; government revenue; debt ceiling; public investment (search for similar items in EconPapers)
Date: 2002
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Citations: View citations in EconPapers (10)

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Working Paper: Public Finance under Political Instability and Debt Conditionality (2003)
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