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Fiscal Rigidities, Public Debt, and Capital Flight

Author

Listed:
  • Alain Ize

    (International Monetary Fund)

  • Guillermo Ortiz

    (International Monetary Fund)

Abstract

This paper associates exchange rate crises and capital flight with the possibility of default on public debt resulting from fiscal rigidities. By including interest-bearing debt, both domestic and external, the model can generate the timing of an attack and can explain why domestic public bonds, even when perfectly indexed, cannot eliminate the possibility of a crisis. This fiscal framework provides explanations for the simultaneity of private capital flight and public foreign borrowing and wide observed fluctuations in real exchange rates, with recent Mexican experience as illustration.

Suggested Citation

  • Alain Ize & Guillermo Ortiz, 1987. "Fiscal Rigidities, Public Debt, and Capital Flight," IMF Staff Papers, Palgrave Macmillan, vol. 34(2), pages 311-332, June.
    • Handle: RePEc:pal:imfstp:v:34:y:1987:i:2:p:311-332
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    Citations

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    Cited by:

    1. William C. Gruben & Darryl McLeod, 1999. "Is foreign-currency indexed debt a commitment technology? some evidence from Brazil and Mexico," Working Papers 9913, Federal Reserve Bank of Dallas.
    2. Piersanti, Giovanni, 2012. "The Macroeconomic Theory of Exchange Rate Crises," OUP Catalogue, Oxford University Press, number 9780199653126.
    3. Kouakou Jean Claude Brou & M. Thiam, 2023. "External debt and capital flight in sub-Saharan Africa: The role of institutions [Dette extérieure et fuite des capitaux en Afrique subsaharienne : Le rôle des institutions]," Post-Print hal-04540643, HAL.
    4. Pierre-Richard Agénor & Jagdeep S. Bhandari & Robert P. Flood, 1992. "Speculative Attacks and Models of Balance of Payments Crises," IMF Staff Papers, Palgrave Macmillan, vol. 39(2), pages 357-394, June.
    5. Helmut Reisen, 1991. "Dette publique, compétitivité extérieure et discipline budgétaire dans les pays en développement," Revue Tiers Monde, Programme National Persée, vol. 32(126), pages 317-342.
    6. Alesina, Alberto & Tabellini, Guido, 1989. "External debt, capital flight and political risk," Journal of International Economics, Elsevier, vol. 27(3-4), pages 199-220, November.
    7. Ulrich Thießen, 1995. "Competitiveness of Central-Eastern European Countries," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 64(2), pages 279-302.
    8. Jean Claude Kouakou Brou & Mamadou Thiam, 2023. "External debt and capital flight in sub-Saharan Africa: The role of institutions," Economics Bulletin, AccessEcon, vol. 43(4), pages 1642-1655.
    9. van Wijnbergen, Sweder, 1991. "Should price reform proceed gradually or in a"big bang?"," Policy Research Working Paper Series 702, The World Bank.
    10. Marcella Mulino, 2002. "On the determinants of capital flight from Russia," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 30(2), pages 148-169, June.
    11. Letete Emmanuel & Sarr Mare, 2017. "Working Paper 275 - Illicit Financial Flows and Political Institutions in Kenya," Working Paper Series 2392, African Development Bank.
    12. Hofman, Bert & Reisen, Helmut, 1990. "Debt overhang, liquidity constraints and adjustment incentives," Kiel Working Papers 432, Kiel Institute for the World Economy (IfW Kiel).
    13. Eliana Cardoso, 1991. "From Inertia to Megainflation: Brazil in the 1980s," NBER Working Papers 3585, National Bureau of Economic Research, Inc.
    14. Niels Hermes & Robert Lensink & Victor Murinde, 2002. "Flight Capital and its Reversal for Development Financing," WIDER Working Paper Series DP2002-99, World Institute for Development Economic Research (UNU-WIDER).
    15. B.W. Smit & B.A. Mocke, 1991. "Capital Flight from South Africa: Magnitude and Causes," South African Journal of Economics, Economic Society of South Africa, vol. 59(2), pages 60-77, June.
    16. William C. Gruben, 1996. "Policy priorities and the Mexican exchange rate crisis," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q I, pages 19-29.
    17. Seung-Gwang Baek & Doo Yong Yang, 2010. "Institutional Quality, Captal Flight and Capital Flows," Korean Economic Review, Korean Economic Association, vol. 26, pages 121-155.
    18. Franke, Günter & Benninga, Simon, 1989. ""Closet dollars" and taxes," Discussion Papers, Series II 77, University of Konstanz, Collaborative Research Centre (SFB) 178 "Internationalization of the Economy".
    19. David B. Gordon & Ross Levine, 1988. "The capital flight \"problem.\"," International Finance Discussion Papers 320, Board of Governors of the Federal Reserve System (U.S.).
    20. de Aghion, Beatriz Armendariz & de Hinestrosa, Patricia Armendariz, 1995. "Debt relief, growth and price stability in Mexico," Journal of Development Economics, Elsevier, vol. 48(1), pages 135-149, October.
    21. De La Cruz Martínez, Justino, 1994. "Mexico's macroeconomic performance: an analysis using co-integration techniques," ISU General Staff Papers 1994010108000011593, Iowa State University, Department of Economics.
    22. Fischer, Stanley, 1989. "The economics of the government budget constraint," Policy Research Working Paper Series 224, The World Bank.
    23. Graciela L. Kaminsky, 1998. "Currency and banking crises: the early warnings of distress," International Finance Discussion Papers 629, Board of Governors of the Federal Reserve System (U.S.).
    24. Islam, Roumeen & Wetzel, Deborah L., 1991. "The macroeconomics of public sector deficits : the case of Ghana," Policy Research Working Paper Series 672, The World Bank.

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