Seigniorage and Political Instability

Abstract

The importance of seignorage relative to other sources of government revenue differs markedly across countries. The main theoretical implication of this paper is that countries with more unstable and polarized political systems rely more heavily on seignorage. This result is obtained within the context of a political model of tax reform. The model implies that the more unstable and polarized the political system, the more inefficient is the equilibrium tax structure (in the sense that tax collection is more costly to administer), and the higher therefore, the reliance on seignorage. This prediction of the model is tested on cross-section data for 79 countries. It is found that, after controlling for other variables, political instability significantly contributes to explain the fraction of government revenue derived from seignorage. This finding is very robust. We also find that seignorage is positively related to political polarization, even though here the evidence is weaker because of difficulties in measuring polarization.

Does IMF Support Accelerate Inflation Stabilization?

“…Since our sample includes 18 ERBS (out of 25 plans), a positive coefficient is expected for this variable; 8 -Fragmentation=1 and Fragmentation=2: dummies for the lower degrees of fragmentation of the political system (Fragmentation>2, that stands for coalition and minority governments, is left out of the regressions). Greater fragmentation of the political system leads to greater delays in the models of Alesina and Drazen (1991), Cukierman et al (1992) and Drazen and Grilli (1993). Thus, positive coefficients are expected for these dummy variables;…”

“…Political instability and polarization are the key factors leading to an excessive use of seigniorage in the model of Cukierman, Edwards and Tabellini (1992). When incumbent policymakers face a small probability of re-election and have different preferences from the prospective winners, they are induced to delay reform and leave an inefficient tax system to their successors.…”

Political institutions and economic growth reconsidered

“…While these indicators probably capture some aspects of political instability, they are certainly not perfect. Some authors acknowledge the problem of measurement error and combine various indicators in a single index, while others predict the propensity of government change using binary choice models in which the occurrence of government transfers is related to various economic, political and institutional variables (e.g., Cukierman et al 1992). These approaches have in common that the used indicators are assumed to be highly correlated with political instability and that political instability is a one-dimensional concept.…”

The effect of monetary unification on public debt and its real return

“…In both cases, there is a stronger incentive to spend more now, because any remaining resources might be spent by another government with potentially different preferences. Cukierman et al (1992) in their model derive the government's "effective" discount rate as an explicit function of the political factors mentioned here. international trade takes place without any barriers and that each individual, wherever she resides, consumes the same good or bundle of goods.…”