TY  - JOUR
AU  - Drazen,Allan
TI  - Towards a Political-Economic Theory of Domestic Debt
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 5890
PY  - 1997
Y2  - January 1997
UR  - http://www.nber.org/papers/w5890
L1  - http://www.nber.org/papers/w5890.pdf
N1  - Author contact info:
Allan Drazen
Department of Economics
University of Maryland
College Park, MD 20742
Tel: 301/405-3477
Fax: 301/405-7835
E-Mail: drazen@econ.umd.edu
AB  - A political-economic model of the composition of government debt, that is, whether it is issued to domestic or foreign holders, is presented.  The key determinant will be the political constraints on repudiation of foreign and domestic debt, which will determine the nature of the domestic political equilibrium.  Economic and political factors determine the effective cost of borrowing at home or abroad, and with the ability to segment markets the government acts like a discriminating monopsonist in placing its debt.  A country that expects to face a low effective foreign interest rate, reflecting the expectation that it won't be forced to repay its foreign debts in full, will be characterized by high government spending, a high government budget deficit, low domestic saving and thus a high trade balance deficit so that the domestic economy will look mismanaged in terms of a number of macroeconomic indicators.  Very lenient foreign assistance programs would have the same effect.
ER  -