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  4. September 2010
  5. Elections, Capital Flows, and Politico-economic Equilibria

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Elections, Capital Flows, and Politico-economic Equilibria

  • Roberto Chang
American Economic Review
vol. 100, no. 4, September 2010
(pp. 1759–77)
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Abstract

We study an open economy where a pro-labor and a pro-business candidate compete in an election. The winner chooses taxes, which affect investment returns. Electoral outcomes depend on the size of the foreign debt, but the debt itself reflects expectations about the election. The resulting interaction is novel and has several implications. Elections are associated with increased volatility. Politico-economic crises can occur. Inefficiencies vanish if the candidates commit to an appropriate tax policy, but such commitments have predictable effects on the election. Empirical evidence supporting the theory is discussed. (JEL D72, F34, O17, O19)

Citation

Chang, Roberto. 2010. "Elections, Capital Flows, and Politico-economic Equilibria." American Economic Review, 100 (4): 1759–77. DOI: 10.1257/aer.100.4.1759

Additional Materials

JEL Classification

  • D72 Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
  • F34 International Lending and Debt Problems
  • O17 Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
  • O19 International Linkages to Development; Role of International Organizations