Beiträge zur Jahrestagung des Vereins für Socialpolitik 2010: Ökonomie der Familie - Session: Economic Policy in the EMU F16-V3
Opportunistic politicians use the composition of public debt as a signal for competence. A competent government will not issue long-term nominal debt, as optimal to balance the budget, but long-term inflation-indexed debt. We consider politicians that pursue the objective of a balanced budget subject to the Stability and Growth Pact and reelection. A government's competence is reflected by its ability to produce a public service at a lower cost (taxes). Competence is private information of politicians.
Political Budget Cycle Debt Management Indexed Bonds Stability Pact