The trade-off between monetary and fiscal solidity: international lenders and political instability

Frank Bohn

No 200408, Working Papers from School of Economics, University College Dublin

Abstract: This paper analysis the intertemporal public finance decision under political instability. The government’s choice between inflationary finance and foreign debt is constrained by an interest rate, which is affected both by market conditions and debt conditionality. The main result is that there is typically a trade-off between seigniorage taxation and foreign debt. There are two implications. First, monetary and fiscal solidity can typically not be achieved at the same time. Second, myopic behaviour produced by political instability leads to a reduction of seigniorage, not to an increase as argued, for instance, by Cukierman, Edwards and Tabellini (AER, 1992).

Keywords: Debt conditionality; Myopic behaviour; Political economy; Seigniorage; Government deficit; Public finance; Finance, Public; Political stability; Seigniorage (Finance) (search for similar items in EconPapers)
JEL-codes: E63 F34 O23 (search for similar items in EconPapers)
Date: 2004-05
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Citations: View citations in EconPapers (3)

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http://hdl.handle.net/10197/1788 First version, 2004 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:ucn:wpaper:200408

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