Working Paper: CEPR ID: DP253
Authors: Alberto Alesina; Guido Tabellini
Abstract: This paper provides an explanation of the simultaneous occurrence in developing countries of a large accumulation of external debt, private capital outflows and relatively low domestic capital formation. We consider a general equilibrium model in which two types of government with conflicting distributional goals randomly alternate in office. Uncertainty over the fiscal policies of future governments generates private capital flight and reduced domestic investment. This political uncertainty also provides the incentives for the current government to over-accumulate external debt. The model also predicts that left-wing governments are more inclined to impose restrictions on capital outflows than right-wing governments. Finally, we examine how political uncertainty affects the risk premium charged by lenders and how debt repudiation may occur after a change of political regime.
Keywords: capital flight; external debt; fiscal policy; political economy; debt repudiation; capital controls
JEL Codes: 430; 432
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Political uncertainty (D89) | private capital flight (F21) |
| Political uncertainty (D89) | reduced domestic investment (E20) |
| Left-wing governments (P39) | more capital controls (F38) |
| Political risk (P26) | risk premium charged by lenders (G21) |
| Current government does not internalize future costs (H19) | overaccumulation of external debt (F34) |
| Political polarization (D72) | public debt accumulation (H63) |
| Political polarization (D72) | private capital flight (F21) |