Working Paper: NBER ID: w3493
Authors: Sebastian Edwards; Guido Tabellini
Abstract: In this paper we investigate erririca1ly the determinants of inflation, seigniorage an fiscal deficits in developing countries. We first test the optimal taxation theory of inflation for a grip of 21 LDCs. We find that the implications of this theory is rejected for all the countries. We then proceed to implement a number of tests based on the new political economy approach to macroeconomic policies: we deal with some of the implications of a credibility and reputation model, and of a strategic government behavior model. We find that the data supports the most important predictions of the political economy view of fiscal policy. Our measures of political instability and political polarization play an important role in explaining cross country differences in seigniorage, inflation, government borrowing and fiscal deficits. We end by discussing directions for future research.
Keywords: inflation; seigniorage; fiscal deficits; developing countries; political economy
JEL Codes: E62; H63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| political instability (O17) | fiscal deficits (H68) |
| political polarization (D72) | seigniorage (E42) |
| political instability (O17) | government borrowing (H74) |
| government behavior (H10) | inflation tax (E31) |