Sovereign Borrowing and Imperial Debt Policy
Sovereign Borrowing and Imperial Debt Policy
This chapter presents a model of the political economics of sovereign borrowing. It establishes the conditions under which a ruler will seek to borrow and capitalists will agree to lend, despite having no access to third-party enforcement of the debt contract. The model corresponds to fundamental features of the political institutions that governed fiscal practice in Imperial Brazil. The chapter highlights how particular institutional arrangements permit higher levels of borrowing at lower cost—stylized conditions that correspond remarkably well to the Imperial state's own institutions and to its own experience in the capital markets. The most visible of these institutions was the division of fiscal authority between the executive and the legislative branch defined by the Constitution of 1824. The chapter also establishes the contours of Brazil's public finances from independence in 1822 to the fall of the constitutional monarchy in 1889. It tests the hypothesis that the Empire's fiscal policy had been sustainable.
Keywords: sovereign borrowing, Imperial Brazil, constitutional monarchy, Constitution of 1824, public finances, fiscal policy
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