We document an empirical puzzle for EMS exchange rates during a period in which the bands on these exchanges rates were (almost) credible, i.e. exchange rate distributions are humpshaped rather than U-shaped as predicted by the standard target zone model. We offer an explanation of this puzzle...

The trade-off between inflation and taxation is analysed in a model with heterogeneity in nominal debt holdings. This creates a political conflict among the electorate. As a bench-mark we study a quot;completely representativequot; democracy, where more inequality leads to higher equilibrium...

This comment extends Calvo's (1988) analysis of the relation between expectations and the number of repudiation equilibria in public debt management, in order to analyse the effects of heterogeneity in (nominal) debt holdings. It is shown that the number of equilibria depends on the relative...

Macroeconomic stabilisation and foreign exchange market interventions are inves-tigated within the context of a stochastic small open economy. With money demand shocks a peg is optimal, but with goods demand shocks a nominal income target is best. With supply shocks the optimal degree of...

A democratic society in which the distribution of wealth is unequal elects political parties that are likely to represent the interests of poor people. It is in the interests of the clientele of the resulting governments to attempt to levy inflation taxes in order to erode the real value of debt...

This paper analyzes the decision of a government facing electoral uncertainty to implement structural reforms in the presence of fiscal restraints similar to the Stability and Growth Pact. The model shows that a pact may harm structural reforms, sacrificing future growth for present stability....